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Epidemics of Liquidity Shortages in Interbank Markets

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  • Giuseppe Brandi
  • Riccardo Di Clemente
  • Giulio Cimini

Abstract

Financial contagion from liquidity shocks has being recently ascribed as a prominent driver of systemic risk in interbank lending markets. Building on standard compartment models used in epidemics, in this work we develop an EDB (Exposed-Distressed-Bankrupted) model for the dynamics of liquidity shocks reverberation between banks, and validate it on electronic market for interbank deposits data. We show that the interbank network was highly susceptible to liquidity contagion at the beginning of the 2007/2008 global financial crisis, and that the subsequent micro-prudential and liquidity hoarding policies adopted by banks increased the network resilience to systemic risk---yet with the undesired side effect of drying out liquidity from the market. We finally show that the individual riskiness of a bank is better captured by its network centrality than by its participation to the market, along with the currently debated concept of "too interconnected to fail".

Suggested Citation

  • Giuseppe Brandi & Riccardo Di Clemente & Giulio Cimini, 2016. "Epidemics of Liquidity Shortages in Interbank Markets," Papers 1610.03259, arXiv.org, revised May 2018.
    • Handle: RePEc:arx:papers:1610.03259
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    1. Valentina Macchiati & Giuseppe Brandi & Tiziana Di Matteo & Daniela Paolotti & Guido Caldarelli & Giulio Cimini, 2022. "Systemic liquidity contagion in the European interbank market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(2), pages 443-474, April.
    2. Ricciardi, Gianmarco & Montagna, Guido & Caldarelli, Guido & Cimini, Giulio, 2023. "Dimensional reduction of solvency contagion dynamics on financial networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 630(C).
    3. Macchiati, Valentina & Mazzarisi, Piero & Garlaschelli, Diego, 2024. "Interbank network reconstruction enforcing density and reciprocity," Chaos, Solitons & Fractals, Elsevier, vol. 186(C).
    4. EDOARDO GAFFEO & Lucio Gobbi & Massimo Molinari, 2018. "Bilateral netting and systemic liquidity shortages in banking networks," DEM Working Papers 2018/06, Department of Economics and Management.
    5. X. Zhang & L. D. Valdez & H. E. Stanley & L. A. Braunstein, 2019. "Modeling Risk Contagion in the Venture Capital Market: A Multilayer Network Approach," Complexity, Hindawi, vol. 2019, pages 1-11, December.
    6. Shanshan Jiang & Hong Fan & Min Xia, 2018. "Credit Risk Contagion Based on Asymmetric Information Association," Complexity, Hindawi, vol. 2018, pages 1-11, July.
    7. Edoardo Gaffeo & Lucio Gobbi, 2022. "Correction to: Achieving financial stability during a liquidity crisis: a multi‑objective approach," Risk Management, Palgrave Macmillan, vol. 24(1), pages 100-100, March.
    8. Valentina Macchiati & Piero Mazzarisi & Diego Garlaschelli, 2024. "Interbank network reconstruction enforcing density and reciprocity," Papers 2402.11136, arXiv.org, revised Jul 2024.
    9. Chen, Naixi & Fan, Hong, 2023. "Contagion and supervision of liquidity crisis in interbank markets: Based on the SIS network model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 629(C).
    10. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    11. Chen, Naixi & Fan, Hong, 2023. "Credit risk contagion and optimal dual control—An SIS/R model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 210(C), pages 448-472.
    12. Chen, Naixi & Fan, Hong & Pang, Congyuan, 2024. "Contagion mechanism of liquidity risk in the interbank network," Economic Modelling, Elsevier, vol. 140(C).
    13. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.

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