Bank networks: Contagion, systemic risk and prudential policy

Iñaki Aldasoro, Domenico Delli Gatti and Ester Faia

No 87, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a coreperiphery structure, dis-assortative behavior and low density. 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; systemic risk; contagion; fire sales; prudential regulation (search for similar items in EconPapers)
JEL-codes: C63 D85 G21 G28 L14 (search for similar items in EconPapers)
Date: 2015, Revised 2015
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 (35)

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Related works:
Journal Article: Bank networks: Contagion, systemic risk and prudential policy (2017)
Working Paper: Bank networks: contagion, systemic risk and prudential policy (2016)
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015)
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015)
Working Paper: Bank Networks: Contagion, Systemic Risk and Prudential Policy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:87

DOI: 10.2139/ssrn.2572877

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