Systemic risk, interbank relations and liquidity provision by the Central Bank

By Xavier Freixas, Bruno Parigi, Jean-Charles Rochet. 2000

1,400 citations recorded by the source corpus.

We model systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure (gridlock equilibrium) even if all banks are solvent. When one bank is insolvent, the stability of the banking system is affected in various ways depending on the patterns of payments across locations. We investigate the ability of the banking system to withstand the insolvency of one bank and whether the closure of one bank generates a chain reaction on the rest of the system. We analyze the coordinating role of the Central Bank in preventing payments systemic repercussions and we examine the justification of the Too-big-to-fail-policy.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6e016a4b244efb133ec87944c59a9c14dbc90c45

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Citations in the corpus

Contagion in financial networks (2010, background): “1See Rajan (2005) for a policymaker's view of the recent trends in nancial development and Haldane (2009) for a discussion of the role that the structure and complexities of the nancial network have played in the nancial turmoil of 2007-09.”
The financial accelerator in an evolving credit network (2010, background): “A nonnegligible and growing literature has developed from these premises on the network of the interbank market (Freixas et al., 2000; Furfine, 2003; Boss et al., 2004; Iori et al., 2006; Nier et al., 2007).”
Core–Periphery Structure in the Overnight Money Market: Evidence from the e-MID Trading Platform (2015, background): “Keywords: interbank market, network models, systemic risk, financial crisis JEL classification: G21, G01, E42 Daniel Fricke Kiel Institute for the World Economy 24105 Kiel, Germany Telephone: +49 431 8814-229 E-mail: daniel.fricke@ifw-kiel.de Thomas Lux Kiel Institute for the World Economy 24105…”
The formation of financial networks: XXX (2013, background): “For instance, Freixas et al. (2000) considers the case of banks that face liquidity needs as consumers are uncertain about where they are to consume.”
Multiplex Interbank Networks and Systemic Importance: An Application to European Data (2016, neutral): “29For applications to interbank networks see: Craig and von Peter (2014) who propose an algorithm for the identification of the core set of banks based on the idea of intermediation and use it with German data, Fricke and Lux (2012) for the case of Italy, van Lelyveld and In’t Veld (2012) for the Ne”
Do Interbank Customer Relationships Exist? And How Did They Function in the Crisis? Learning from Italy (2012, positive): “Furfine (2001) analyses the effects of interbank customer relationships (measured by different indexes) on the U.S. interbank interest rates, but he assumes but does not demonstrate their existence. Cocco et al. (2009) step forward. Not only they estimate the effect of interbank customer relationshi”
Network topology of the interbank market (2003, background): “Freixas et al [9] contrast a circular graph with a fully connected graph, and Thurner et al [10] studies a much richer set of different network structures which are used in an agent-based model where banks minimize individual risk.”