Bank Networks: Contagion, Systemic Risk and Prudential Policy
Domenico Delli Gatti () and
Ester Faia ()
No 10540, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a core-periphery structure, dis-assortative behavior and low density. 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 increasestability) without reducing significantly overall investment.
Keywords: banking networks; contagion; fire sales; prudential regulation; systemic risk (search for similar items in EconPapers)
JEL-codes: C63 D85 G21 G28 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-gth and nep-net
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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)
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