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From banks' strategies to financial (in)stability

Simone Berardi and Gabriele Tedeschi ()

No 47, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Abstract: This paper aims to shed light on the emergence of systemic risk in credit systems. By developing an interbank market with heterogeneous financial institutions granting loans on different network structures, we investigate what market architecture is more resilient to liquidity shocks and how the risk spreads over the modeled system. In our model, credit linkages evolve endogenously via a fitness measure based on different banks strategies. Each financial institution, in fact, applies a strategy based on a low interest rate, a high supply of liquidity or a combination of them. Interestingly, the choice of the strategy in uences both the banks' performance and the network topology. In this way, we are able to identify the most effective tactics adapt to contain contagion and the corresponding network topology. Our analysis shows that, when financial institutions combine the two strategies, the interbank network does not condense and this generates the most efficient scenario in case of shocks.

Keywords: interbank market; dynamic network; fitness model; network resilience; bank strategy (search for similar items in EconPapers)
JEL-codes: G01 G02 D85 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-ger
Date: 2015
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Journal Article: From banks' strategies to financial (in)stability (2017) Downloads
Working Paper: From banks’ strategies to financial (in)stability (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fmpwps:47

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