The Link Between Incomplete Information on the Interbank Network and Counterparty Risk
Daniel Foerster () and
Martin Walther ()
Additional contact information
Daniel Foerster: Technische Universität Berlin, Chair of Finance and Investment, Sec. H 64, Straße des 17. Juni 135, 10623 Berlin, Germany
Martin Walther: Technische Universität Berlin, Chair of Finance and Investment, Sec. H 64, Straße des 17. Juni 135, 10623 Berlin, Germany
Credit and Capital Markets, 2019, vol. 52, issue 2, 213-227
This paper describes a model in which a network of interbank loans leads to a severe amplification of the previously unanticipated insolvency of one bank. Banks that cannot rule out an indirect hit react by selling assets and hoarding liquidity. While this potentially lowers illiquidity risks, it depresses market liquidity and prices. This leads to a negative externality by which sales to acquire liquidity simultaneously lead to lower global sale proceeds and thus to a greater number of insolvencies inducing deadweight losses. Thus, the distribution of information on the network has a direct impact on welfare by itself.
JEL-codes: G01 G11 G21 G33 (search for similar items in EconPapers)
References: Add references at CitEc
Citations: Track citations by RSS feed
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kuk:journl:v:52:y:2019:i:2:p:213-227
Access Statistics for this article
More articles in Credit and Capital Markets from Credit and Capital Markets
Bibliographic data for series maintained by Credit and Capital Markets ().