Network reactions to banking regulations

Selman Erol and Guillermo Ordonez

Journal of Monetary Economics, 2017, vol. 89, issue C, 51-67

Abstract: Optimal regulatory restrictions on banks have to solve a delicate balance. Tighter regulations reduce the likelihood of banks’ distress. Looser regulations foster the allocation of funds toward productive investments. With multiple banks, optimal regulation becomes even more challenging. Banks form partnerships in the interbank lending market in order to face liquidity needs and to meet investment possibilities. We show that the interbank network can suddenly collapse when regulations are pushed beyond a critical level, with a discontinuous increase in systemic risk as the cross-insurance of banks collapses.

Keywords: Banking regulations; Interbank networks; Systemic risk (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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Working Paper: Network Reactions to Banking Regulations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:89:y:2017:i:c:p:51-67

DOI: 10.1016/j.jmoneco.2017.03.005

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