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Interbank Lending, Reserve Requirements and Systemic Risk

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Abstract

We 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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File URL: http://repec.org/CE/iori_jafarey_padilla.pdf
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Bibliographic Info

Paper provided by Society for Computational Economics in its series Modeling, Computing, and Mastering Complexity 2003 with number 17.

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Length: pages 38 pages
Date of creation: 27 Jul 2003
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Handle: RePEc:sce:cplx03:17

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Web page: http://zai.ini.unizh.ch/complexity2003/
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Keywords: Systemic risk; contagion; interbank lending;

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Cited by:
  1. Dairo Estrada & Daniel Osorio, . "A Market Risk Approach to Liquidity Risk and Financial Contagion," Borradores de Economia 384, Banco de la Republica de Colombia.
  2. Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.

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