Endogenous banks' networks, cascades and systemic risk

Marcel Bluhm, Ester Faia and Jan Krahnen ()

No 12, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We develop a network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in re-sales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by re-sales. 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: C63 D85 G01 G28 (search for similar items in EconPapers)
Date: 2014, Revised 2014
New Economics Papers: this item is included in nep-ban and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:12

DOI: 10.2139/ssrn.2235520

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