Bank Networks: Contagion, Systemic Risk and Prudential Policy
By Iñaki Aldasoro, Domenico Delli Gatti, Ester Faia. Social Science Research Network, 2017
126 citations recorded by the source corpus.
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. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. 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.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/ea6b0d4d336c7636d5e9604586a8c198e88da576
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Citations in the corpus
- Too Interconnected to Fail: A Survey of the Interbank Networks Literature (2015, background): “The theoretical network literature has done policy experiments to simulate the impact of different regulatory measures on systemic risk (Aldasoro et al., 2015; Gai et al., 2011; Ha laj and Kok, 2015; Haldane and May, 2011; Nier et al., 2007). After having briefly discussed the literature reviewed in”