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Criticality in a model of banking crises

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  • Iori, Giulia
  • Jafarey, Saqib

Abstract

An interbank market lets participants pool the risk arising from the combination of illiquid investments and random withdrawals by depositors. But it also creates the potential for one bank's failure to trigger off avalanches of further failures. We simulate a model of interbank lending to study the interplay of these two effects. We show that when banks are similar in size and exposure to risk, avalanche effects are small so that widening the interbank market leads to more stability. But as heterogeneity increases, avalanche effects become more important. By varying the heterogeneity and connectivity across banks, the system enters a critical regime with a power law distribution of avalanche sizes.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437101002977
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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 299 (2001)
Issue (Month): 1 ()
Pages: 205-212

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Handle: RePEc:eee:phsmap:v:299:y:2001:i:1:p:205-212

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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Cited by:
  1. Frank Schweitzer & Giorgio Fagiolo & Didier Sornette & Fernando Vega-Redondo & Douglas R. White, 2009. "Economic Networks: What Do We Know And What Do We Need To Know?," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 407-422.
  2. Cohen-Cole, Ethan & Patacchini, Eleonora & Zenou, Yves, 2011. "Systemic Risk and Network Formation in the Interbank Market," Research Papers in Economics 2011:6, Stockholm University, Department of Economics.
  3. Guido Fioretti, 2005. "Credit Rationing in a Basic Agent-Based Model," Finance 0505002, EconWPA.
  4. Martínez-Jaramillo, Serafín & Pérez, Omar Pérez & Embriz, Fernando Avila & Dey, Fabrizio López Gallo, 2010. "Systemic risk, financial contagion and financial fragility," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2358-2374, November.

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