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Pandemic crises in financial systems: a simulation-model to complement stress-testing frameworks

J. Idier and T. Piquard

Working papers from Banque de France

Abstract: We propose in this paper a simulation framework of pandemic in financial system composed of banks, asset markets and interbank markets. This framework aims at complementing the usual stress-test strategies that evaluate the impact of shocks on individual balance-sheets without taking into account the interactions between several components of the financial system. We build on the network model of Gourieroux, Heam, and Monfort (2012) for the banking system, adding some asset market channels as in Greenwood, Landier, and Thesmar (2015) and interbank markets characterized by collateralized debt and margin calls. We show that rather small shocks can be amplified and destabilize the entire financial system. In our framework, the fact that the system enters in an adverse situation comes from first round losses amplification triggered by asset depreciation, interbank contraction and bank failures in chain. From our simulations, we explain how the different channels of transmission play a role in weakening the financial system, and measure the extent to which each channel could make banks more vulnerable.

Keywords: Bank network; systemic risk; contagion; stress-testing (search for similar items in EconPapers)
JEL-codes: E52 E44 G12 C58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp and nep-mac
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:621

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