Endogenous banks' networks, cascades and systemic risk
Ester Faia () and
Jan Krahnen ()
No 12, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt
We develop a dynamic network model whose links are governed by banks' optimizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is trasmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.
Keywords: Network formation; tâtonnement; contagion (search for similar items in EconPapers)
JEL-codes: G0 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:12
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