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Systemic liquidity shortages and interbank network structures

  • Lee, Seung Hwan
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    This paper aims to shed light on the systemic nature of liquidity risk and to propose a method for calculating systemic liquidity shortages. Our method incorporates not only direct liquidity shortages but also indirect liquidity shortages due to the knock-on effects through interbank linkages. We perform a simulation with a simple banking system model and find that a deficit bank can mitigate a liquidity shortage by holding more claims on a surplus bank. Meanwhile, a greater imbalance in liquidity positions across banks tends to aggravate the liquidity shortage of a deficit bank. According to comparative analysis between different types of network structures, a core-periphery network with a deficit money center bank gives rise to the highest level of systemic liquidity shortage, and a banking system becomes more vulnerable to liquidity shocks as its interbank network becomes more ill-matched.

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    File URL: http://www.sciencedirect.com/science/article/pii/S157230891200071X
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    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 9 (2013)
    Issue (Month): 1 ()
    Pages: 1-12

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    Handle: RePEc:eee:finsta:v:9:y:2013:i:1:p:1-12
    DOI: 10.1016/j.jfs.2012.12.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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