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Systemic liquidity shortages and interbank network structures

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  • Lee, Seung Hwan
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    Abstract

    This paper aims to shed light on the systemic nature of liquidity risk and to propose a method for calculating systemic liquidity shortages. Our method incorporates not only direct liquidity shortages but also indirect liquidity shortages due to the knock-on effects through interbank linkages. We perform a simulation with a simple banking system model and find that a deficit bank can mitigate a liquidity shortage by holding more claims on a surplus bank. Meanwhile, a greater imbalance in liquidity positions across banks tends to aggravate the liquidity shortage of a deficit bank. According to comparative analysis between different types of network structures, a core-periphery network with a deficit money center bank gives rise to the highest level of systemic liquidity shortage, and a banking system becomes more vulnerable to liquidity shocks as its interbank network becomes more ill-matched.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 9 (2013)
    Issue (Month): 1 ()
    Pages: 1-12

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    Handle: RePEc:eee:finsta:v:9:y:2013:i:1:p:1-12

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

    Related research

    Keywords: Liquidity shortage; Interbank network; Systemic risk; Knock-on effect;

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    References

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    1. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
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    3. Thomas Lux, Daniel Fricke, 2012. "Core-Periphery Structure in the Overnight Money Market: Evidence from the e-MID Trading Platform," Kiel Working Papers 1759, Kiel Institute for the World Economy.
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    Cited by:
    1. Sergio R. S. Souza & Benjamin M. Tabak & Solange M. Guerra, 2013. "Insolvency and Contagion in the Brazilian Interbank Market," Working Papers Series 320, Central Bank of Brazil, Research Department.
    2. Peltonen, Tuomas A. & Scheicher, Martin & Vuillemey, Guillaume, 2013. "The network structure of the CDS market and its determinants," Working Paper Series 1583, European Central Bank.

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