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Rollover risk, network structure and systemic financial crises

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  • Anand, Kartik
  • Gai, Prasanna
  • Marsili, Matteo

Abstract

The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/2008. Drawing on ideas from global games and network growth, we show how network topology interacts with the funding structure of financial institutions to determine system-wide crises. Bad news about a financial institution can lead others to lose confidence in it and their withdrawals, in turn, trigger problems across the interbank network. Once broken, credit relations take a long time to re-establish as a result of common knowledge of the equilibrium. Our findings shed light on public policy responses during and after the crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 8 ()
Pages: 1088-1100

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:8:p:1088-1100

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Interbank networks; Credit crisis; Liquidity freeze;

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