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Funding Liquidity Risk in a Quantitative Model of Systemic Stability

In: Financial Stability, Monetary Policy, and Central Banking

  • David Aikman
  • Piergiorgio Alessandri
  • Bruno Eklund
  • Prasanna Gai
  • Sujit Kapadia,
  • Elizabeth Martin,
  • Nada Mora
  • Gabriel Sterne
  • Matthew Willison

    (Bank of England, Federal Reserve Bank of Kansas City, and Australian National University)

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.

(This abstract was borrowed from another version of this item.)

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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
Contact details of provider: Postal: Casilla No967, Santiago
Phone: (562) 670 2000
Fax: (562) 698 4847
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