Contagion and risk-sharing on the inter-bank market
AbstractIncreasing inter-bank lending has an ambiguous impact on financial stability. Two opposing effects have been identified: promoting stability through risk sharing and providing a channel through which contagion may spread. In this paper we identify the conditions under which each relationship holds. In response to large economy-wide shocks, greater numbers of inter-bank lending relationships are shown to worsen systemic events, however, for smaller shocks the opposite effect is observed. As such there is no optimal inter-bank market structure which maximizes stability under all conditions. In contrast, deposit insurance costs are always reduced under greater numbers of inter-bank lending relationships.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/10.
Date of creation: Nov 2010
Date of revision: Jan 2013
Contact details of provider:
Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
Other versions of this item:
- Ladley, Daniel, 2013. "Contagion and risk-sharing on the inter-bank market," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1384-1400.
- Dan Ladley, 2010. "An economic model of contagion in interbank lending markets," Discussion Papers in Economics 11/06, Department of Economics, University of Leicester, revised Dec 2010.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- Enrique G. Mendoza & Vincenzo Quadrini, 2009.
"Financial Globalization, Financial Crises and Contagion,"
NBER Working Papers
15432, National Bureau of Economic Research, Inc.
- Mendoza, Enrique G. & Quadrini, Vincenzo, 2010. "Financial globalization, financial crises and contagion," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 24-39, January.
- Vincenzo Quadrini & Enrique G. Mendoza, 2010. "Financial Globalization, Financial Crises and Contagion," 2010 Meeting Papers 841, Society for Economic Dynamics.
- Ana Babus, 2006.
"The Formation of Financial Networks,"
Tinbergen Institute Discussion Papers
06-093/2, Tinbergen Institute.
- Franklin Allen & Douglas Gale, 2000.
Journal of Political Economy,
University of Chicago Press, vol. 108(1), pages 1-33, February.
- Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2006.
"Business fluctuations in a credit-network economy,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 370(1), pages 68-74.
- Sandro Brusco & Fabio Castiglionesi, 2007.
"Liquidity Coinsurance, Moral Hazard, and Financial Contagion,"
Journal of Finance,
American Finance Association, vol. 62(5), pages 2275-2302, October.
- Sandro Brusco & Fabio Castiglionesi, 2005. "Liquidity Coinsurance, Moral Hazard and Financial Contagion," Department of Economics Working Papers 05-12, Stony Brook University, Department of Economics.
- Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010.
"Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks,"
- Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk in Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Economics Discussion Papers 683, University of Essex, Department of Economics.
- Roger Lagunoff & Stacey L. Schreft, 1998.
"A Model of Financial Fragility,"
Game Theory and Information
9803001, EconWPA, revised 30 Apr 1998.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998.
"Systemic risk, interbank relations and liquidity provision by the Central Bank,"
Economics Working Papers
440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- 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.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-38, August.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
- Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
- Gary Gorton, 1986.
"Banking panics and business cycles,"
86-9, Federal Reserve Bank of Philadelphia.
- Iori, G. & Masi, G. D. & Precup, O. V. & Gabbi, G. & Caldarelli, G., 2005.
"A network analysis of the Italian oversight money market,"
05/05, Department of Economics, City University London.
- Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
- Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
- Becher, Christopher & Millard, Stephen & SoramÃÂÃÂ¤ki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
- Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008.
"Network models and financial stability,"
Bank of England working papers
346, Bank of England.
- Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
- Giesecke, Kay & Weber, Stefan, 2006. "Credit contagion and aggregate losses," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 741-767, May.
- Didier Cossin & Henry Schellhorn, 2007. "Credit Risk in a Network Economy," Management Science, INFORMS, vol. 53(10), pages 1604-1617, October.
- Q. Farooq Akram & Casper Christophersen, 2010. "Interbank overnight interest rates - gains from systemic importance," Working Paper 2010/11, Norges Bank.
- Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009.
"Interbank market liquidity and central bank intervention,"
Journal of Monetary Economics,
Elsevier, vol. 56(5), pages 639-652, July.
- Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute.
- Allen, Franklin & Carletti, Elena, 2005.
"Credit risk transfer and contagion,"
CFS Working Paper Series
2005/25, Center for Financial Studies (CFS).
- Bosch, A. & Sunder, S., 1994.
"Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium,"
GSIA Working Papers
1994-11, Carnegie Mellon University, Tepper School of Business.
- Antoni Bosch-Domenech & Shyam Sunder, 2000. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," Computational Economics, Society for Computational Economics, vol. 16(3), pages 257-284, December.
- Shyam NMI Sunder & Antoni Bosch-Domènech, 2001. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," Yale School of Management Working Papers ysm204, Yale School of Management.
- Antoni Bosch-Domènech & Shyam Sunder, 1996. "Tracking the invisible hand: Convergence of double auctions to competitive equilibrium," Economics Working Papers 91, Department of Economics and Business, Universitat Pompeu Fabra.
- Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2002.
"Risk Assessment for Banking Systems,"
79, Oesterreichische Nationalbank (Austrian Central Bank).
- Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-41, June.
- Jeannette Müller, 2006. "Interbank Credit Lines as a Channel of Contagion," Journal of Financial Services Research, Springer, vol. 29(1), pages 37-60, February.
- Park, Sangkyun, 1991. "Bank failure contagion in historical perspective," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 271-286, October.
- Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
- 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.
- Sangkyun Park, 1991. "Bank failure contagion in historical perspective," Research Paper 9103, Federal Reserve Bank of New York.
- Fischer, Thomas & Riedler, Jesper, 2012.
"Prices, debt and market structure in an agent-based model of the financial market,"
ZEW Discussion Papers
12-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Fischer, Thomas & Riedler, Jesper, 2013. "Prices, debt and market structure in an agent-based model of the financial market," ZEW Discussion Papers 12-045 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Christoffer Kok & Mattia Montagna, 2013. "Multi-layered Interbank Model for Assessing Systemic Risk," Kiel Working Papers 1873, Kiel Institute for the World Economy.
- Laura Capera & Juan Sebastián Lemus & Dairo Estrada, . "Relaciones crediticias y riesgo de contagio en el mercado interbancario no colateralizado colombiano," Temas de Estabilidad Financiera 077, Banco de la Republica de Colombia.
- Marc de Kamps & Daniel Ladley & Aistis Simaitis, 2012. "Heterogeneous Beliefs in Over-The-Counter Markets," Discussion Papers in Economics 13/03, Department of Economics, University of Leicester, revised Sep 2013.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.