 Contagion mechanism of liquidity risk in the interbank networkNaixi Chen, Hong Fan and Congyuan Pang Economic Modelling, 2024, vol. 140, issue C Abstract: Since the global financial crisis of 2007–2009, preventing financial crises has become one of the most important objectives of regulators and banks. Although previous studies have identified the phenomenon of risk contagion in the banking system, the underlying mechanisms of risk contagion are still unclear. This study delves into the multi-stage contagion mechanism of liquidity risk based on interbank lending linkages and clearing rules and introduces a new index to quantify bank liquidity risk. We find that the contagion of liquidity risk is primarily determined by the network structure of risk exposures between banks in default and is not significantly influenced by the lending relationships of banks that remain solvent. The empirical results suggest that banks with high risk should be prioritized for cash injections to improve system liquidity. These findings offer new insights into financial risk contagion and practical recommendations for regulatory authorities formulating intervention strategies and for banks conducting risk management. Keywords: Interbank network; Contagion mechanism; Liquidity spillover index; Regulatory policies (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:140:y:2024:i:c:s026499932400230x DOI: 10.1016/j.econmod.2024.106873 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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