Interbank Lending, reserve requirements and systemic risk
AbstractWe simulate a model of an interbank market. Each bank faces fluctuations in deposits and a stochastic investment opportunity each period. Invested funds mature with delay. The risk arises of failure due to insufficient liquidity. An interbank market lets participants pool this risk but also creates the potential for one bank's failure to lead to an epidemic of further failures. With homogeneous banks, contagion effects are small and a wider interbank network leads to more stability. When banks differ in liquidity risk or in size, contagion effects become more important. Widening the interbank market can then lead both to episodes of systemic collapse and a larger overall incidence of bank failures.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 63.
Date of creation: 01 Apr 2001
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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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systemic risk; contagion; interbank lending.;
Other versions of this item:
- Giulia Iori & Saqib Jafarey & Francisco Padilla, 2003. "Interbank Lending, Reserve Requirements and Systemic Risk," Modeling, Computing, and Mastering Complexity 2003 17, 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.
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