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Funding Liquidity Risk in a Quantitative Model of Systemic Stability

David Aikman (), Piergiorgio Alessandri, Bruno Eklund, Prasanna Gai, Sujit Kapadia, Elizabeth Martin, Nada Mora (), Gabriel Sterne () and Matthew Willison

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The preliminary version of the model, which is still in its development phase, is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profile and confidence may trigger the outright closure of funding markets. In presenting results, we focus on how policymakers could use the model with reference to both aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side feedbacks, leading to system-wide instability.

Date: 2009-12
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Related works:
Chapter: Funding Liquidity Risk in a Quantitative Model of Systemic Stability (2011) Downloads
Working Paper: Funding liquidity risk in a quantitative model of systemic stability (2009) Downloads
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