How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation

Matteo Serri, Guido Caldarelli and Giulio Cimini

Journal of Network Theory in Finance

Abstract: Assessing the stability of economic systems is a fundamental research focus in economics that has become increasingly interdisciplinary in the currently troubled economic climate. In particular, much attention has been devoted to the interbank lending market as an important diffusion channel for financial distress during the recent crisis. In this paper, we study the stability of the interbank market to exogenous shocks using an agent-based network framework. Our model encompasses several ingredients that have been recognized in the literature as procyclical triggers of financial distress in the banking system: credit and liquidity shocks through bilateral exposures, liquidity hoarding due to counterparty creditworthiness deterioration, target leveraging policies and fire-sale spillovers. However, we exclude the possibility of central authorities intervention. We implement this framework on a data set of 183 European banks that were publicly traded between 2004 and 2013. We document the extreme fragility of the interbank lending market up to 2008, when a systemic crisis leads to total depletion of market equity with an increasing speed of market collapse. After 2008, the system is more resilient to systemic events in terms of residual market equity. However, the speed at which a crisis breaks out reaches a new maximum in 2011, and it never returns to the values observed before 2007. Our analysis points to the key role that crisis outbreak speed plays: it sets the maximum delay for central authorities intervention to be effective.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-network-theory-in- ... distress-propagation (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ8:3916981

Access Statistics for this article

More articles in Journal of Network Theory in Finance from Journal of Network Theory in Finance
Bibliographic data for series maintained by Thomas Paine ().