Contagion and risk-sharing on the inter-bank market
AbstractIncreasing inter-bank lending has an ambiguous impact on financial stability. Using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter-bank lending promotes stability through risk sharing or provides a channel through which failures may spread. In response to large economy-wide shocks, more inter-bank lending relationships worsen systemic events. For smaller shocks the opposite effect is observed. As such no inter-bank market structure maximizes stability under all conditions. In contrast, deposit insurance costs are always reduced under greater numbers of inter-bank lending relationships. A range of regulations are considered to increase system stability.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 37 (2013)
Issue (Month): 7 ()
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Web page: http://www.elsevier.com/locate/jedc
Systemic risk; Inter-bank lending; Contagion; Regulation; Network;
Other versions of this item:
- Dan Ladley, 2010. "Contagion and risk-sharing on the inter-bank market," Discussion Papers in Economics 11/10, Department of Economics, University of Leicester, revised Jan 2013.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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