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Funding Liquidity Risk in a Quantitative Model of Systemic Stability

In: Financial Stability, Monetary Policy, and Central Banking

  • David Aikman

    (Bank of England)

  • Piergiorgio Alessandri

    (Bank of England)

  • Bruno Eklund

    (Bank of England)

  • Prasanna Gai

    (Australian National University)

  • Sujit Kapadia

    (Bank of England)

  • Elizabeth Martin

    (Bank of England)

  • Nada Mora

    (Federal Reserve Bank of Kansas City)

  • Gabriel Sterne

    (Bank of England)

  • Matthew Willison

    (Bank of England)

We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The preliminary version of the model, which is still in its development phase, is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profile and confidence may trigger the outright closure of funding markets. In presenting results, we focus on how policymakers could use the model with reference to both aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side feedbacks, leading to system-wide instability.

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This chapter was published in: Rodrigo Alfaro (ed.) Financial Stability, Monetary Policy, and Central Banking, , chapter 12, pages 371-410, 2011.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v15c12pp371-410.
Handle: RePEc:chb:bcchsb:v15c12pp371-410
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