EconPapers    
Economics at your fingertips  
 

Bank Networks: Contagion, Systemic Risk and Prudential Policy

Iñaki Aldasoro, Domenico Delli Gatti () and Ester Faia
Additional contact information
Domenico Delli Gatti: Università Cattolica del Sacro Cuore

No def028, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

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: C63 D85 G21 G28 L14 (search for similar items in EconPapers)
Pages: 50
Date: 2015-07
New Economics Papers: this item is included in nep-ban, nep-gth and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23) Track citations by RSS feed

Downloads: (external link)
http://dipartimenti.unicatt.it/economia-finanza-def028.pdf First version, 2015 (application/pdf)

Related works:
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:ctc:serie1:def028

Access Statistics for this paper

More papers in DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) Contact information at EDIRC.
Bibliographic data for series maintained by Simone Moriconi ( this e-mail address is bad, please contact ).

 
Page updated 2022-06-15
Handle: RePEc:ctc:serie1:def028