Interbank Lending, Reserve Requirements and Systemic Risk
AbstractWe simulate interbank lending. Each bank faces fluctuations in deposits and stochastic investment opportunities which mature with delay. This creates the risk of liquidity shortages. An interbank market lets participants pool this risk but also creates the potential for one bank's crisis to propagate through the system. We study banking systems with homogeneous banks, as well as systems in which banks are heterogeneous. With homogeneous banks, an interbank market unambiguously stabilises the system. With heterogeneity, knock-on effects become possible but the stabilising role of interbank lending remains so that the interbank market can play an ambiguous role.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Modeling, Computing, and Mastering Complexity 2003 with number 17.
Length: pages 38 pages
Date of creation: 27 Jul 2003
Date of revision:
Systemic risk; contagion; interbank lending;
Other versions of this item:
- giulia iori and Saqib Jafarey, 2001. "Interbank Lending, reserve requirements and systemic risk," Computing in Economics and Finance 2001, Society for Computational Economics 63, Society for Computational Economics.
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- Dairo Estrada & Daniel Osorio, . "A Market Risk Approach to Liquidity Risk and Financial Contagion," Borradores de Economia 384, Banco de la Republica de Colombia.
- Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.
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