The Effect of the Interbank Network Structure on Contagion and Common Shocks

By Co-Pierre Georg. Social Science Research Network, 2013

388 citations recorded by the source corpus.

This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require different optimal policy responses.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/cb1859c485c4c826ca722830db06213ecfec0086

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Citations in the corpus

Climate risk and financial stability in the network of banks and investment funds (2020, neutral): “…and Moore (2002); Caballero and Simsek (2013); Diamond and Rajan (2011); Adrian and Shin (2008); Allen et al. (2012); Caccioli et al. (2014); Georg (2013); Tasca and Battiston (2016), we assume that banks react by liquidating part of their portfolio to quickly restore their initial level of…”
Multi-Layered Interbank Model For Assessing Systemic Risk (2016, background): “Georg (2011) develops a dynamic banking system where banks are allowed to optimize their portfolios of investments and they receive random fluctuation in their deposits.”
Systemic Risk and Stability in Financial Networks (2015, background): “In the non-generic case in which ∑ j=1 n ( z j + c j ) = nv − n ζ A , there may exist a continuum of payment equilibria, in almost all of which banks default due to “coordination failures.””
Too Interconnected to Fail: A Survey of the Interbank Networks Literature (2015, background): “Glasserman and Young (2014) show that this channel of contagion is likely to be considerably more important than direct spillover effects.”
Transmission channels of systemic risk and contagion in the European financial network (2015, neutral): “Co-Pierre (2013) compares systemic risk caused by contagion with the risk triggered by common shocks whilst Drehmann and Tarashev (2013) measure the systemic importance of interconnected banks. Ang and Longstaff (2013) study the nature of systemic sovereign credit risk and observe that it is strongl”