Bankruptcy Cascades in Interbank Markets

Gabriele Tedeschi, Amin Mazloumian, Mauro Gallegati and Dirk Helbing

PLOS ONE, 2012, vol. 7, issue 12, 1-10

Abstract: We study a credit network and, in particular, an interbank system with an agent-based model. To understand the relationship between business cycles and cascades of bankruptcies, we model a three-sector economy with goods, credit and interbank market. In the interbank market, the participating banks share the risk of bad debits, which may potentially spread a bank’s liquidity problems through the network of banks. Our agent-based model sheds light on the correlation between bankruptcy cascades and the endogenous economic cycle of booms and recessions. It also demonstrates the serious trade-off between, on the one hand, reducing risks of individual banks by sharing them and, on the other hand, creating systemic risks through credit-related interlinkages of banks. As a result of our study, the dynamics underlying the meltdown of financial markets in 2008 becomes much better understandable.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0052749

DOI: 10.1371/journal.pone.0052749

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