Bank Networks: Contagion, Systemic Risk and Prudential Policy

Iñaki Aldasoro, Domenico Delli Gatti and Ester Faia

No 5182, CESifo Working Paper Series from CESifo

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 a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects 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 tend to reduce risk (hence increase stability) without reducing significantly overall investment.

Keywords: banking networks; centrality metrics; systemic risk (search for similar items in EconPapers)
JEL-codes: E43 E44 G11 G21 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp5182.pdf (application/pdf)

Related works:
Journal Article: Bank networks: Contagion, systemic risk and prudential policy (2017)
Working Paper: Bank networks: contagion, systemic risk and prudential policy (2016)
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:ces:ceswps:_5182

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().