Bank networks: contagion, systemic risk and prudential policy
Iñaki Aldasoro,
Domenico Delli Gatti and
Ester Faia
No 597, BIS Working Papers from Bank for International Settlements
Abstract:
We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of an assortative matching process. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a core-periphery structure, disassortative behavior and low density. Within this framework we analyse the effects of a stylized set of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk, but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets). Equity requirements also tend to reduce risk (hence increase stability), though without reducing significantly overall investment. On this basis, our results provide general support for the Basel III approach based on complementary regulatory metrics.
Keywords: Banking networks; systemic risk; contagion; fire sales; prudential regulation (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-12
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)
Downloads: (external link)
http://www.bis.org/publ/work597.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work597.htm (text/html)
Related works:
Journal Article: Bank networks: Contagion, systemic risk and prudential policy (2017) 
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015) 
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015) 
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015) 
Working Paper: Bank networks: Contagion, systemic risk and prudential policy (2015) 
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:bis:biswps:597
Access Statistics for this paper
More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().