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Liquidity risk, cash-flow constraints and systemic feedbacks

Sujit Kapadia, Mathias Drehmann (), John Elliott () and Gabriel Sterne ()
Additional contact information
John Elliott: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Gabriel Sterne: Exotix

No 456, Bank of England working papers from Bank of England

Abstract: The endogenous evolution of liquidity risk is a key driver of financial crises. This paper models liquidity feedbacks in a quantitative model of systemic risk. The model incorporates a number of channels important in the current financial crisis. As banks lose access to longer-term funding markets, their liabilities become increasingly short term, further undermining confidence. Stressed banks’ defensive actions include liquidity hoarding and asset fire sales. This behaviour can trigger funding problems at other banks and may ultimately cause them to fail. In presenting results, we analyse scenarios in which these channels of contagion operate, and conduct illustrative simulations to show how liquidity feedbacks may markedly amplify distress.

Keywords: Systemic risk; funding liquidity risk; contagion; stress testing (search for similar items in EconPapers)
JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012-06-21
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Related works:
Chapter: Liquidity Risk, Cash Flow Constraints, and Systemic Feedbacks (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0456

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