 Default risk in an interconnected banking system with endogeneous asset marketsMarcel Bluhm and Jan Krahnen () No 2011/19, CFS Working Paper Series from Center for Financial Studies (CFS) Abstract: This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies. Keywords: Systemic Risk; Systemic Risk Charge; Systemic Risk Fund; Macroprudential Supervision; Shapley Value; Financial Network (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:201119 Access Statistics for this paper More papers in CFS Working Paper Series from Center for Financial Studies (CFS) Contact information at EDIRC. |
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