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Short-Term Liquidity Contagion in the Interbank Market

Listed author(s):
  • Carlos León

    ()

    (Banco de la República de Colombia)

  • Constanza Martínez

    ()

    (Banco de la República de Colombia)

  • Freddy Cepeda

    ()

    (Banco de la República de Colombia)

We implement a modified version of DebtRank, a measure of systemic impact inspired in feedback centrality, to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue, measured as the decrease in financial institutions’ short-term liquidity position across the Colombian interbank network. Concurrent with related literature, unless contagion dynamics are preceded by a major –but unlikely- drop in the short-term liquidity position of all participants, we consistently find that individual and systemic contagion effects are negligible. We find that negative effects resulting from contagion are concentrated in a few financial institutions. However, as most of their impact is conditional on the occurrence of unlikely major widespread illiquidity events, and due to the subsidiary contribution of the interbank market to the local money market, their overall systemic importance is still to be confirmed. Classification JEL:G21, L14, C63

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File URL: http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_920.pdf
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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 920.

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Length: 21
Date of creation: Dec 2015
Handle: RePEc:bdr:borrec:920
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Web page: http://www.banrep.gov.co/es/publicaciones-buscador/23
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  1. Poledna, Sebastian & Molina-Borboa, José Luis & Martínez-Jaramillo, Serafín & van der Leij, Marco & Thurner, Stefan, 2015. "The multi-layer network nature of systemic risk and its implications for the costs of financial crises," Journal of Financial Stability, Elsevier, vol. 20(C), pages 70-81.
  2. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
  3. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
  4. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  5. Stefano Battiston & Marco D'Errico & Stefano Gurciullo & Guido Caldarelli, 2015. "Leveraging the network: a stress-test framework based on DebtRank," Papers 1503.00621, arXiv.org, revised Feb 2016.
  6. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
  7. León, Carlos & Berndsen, Ron J., 2014. "Rethinking financial stability: Challenges arising from financial networks’ modular scale-free architecture," Journal of Financial Stability, Elsevier, vol. 15(C), pages 241-256.
  8. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  9. Benjamin M. Tabak & Sergio R. S. Souza & Solange M. Guerra, 2013. "Assessing Systemic Risk in the Brazilian Interbank Market," Working Papers Series 318, Central Bank of Brazil, Research Department.
  10. Soramäki, Kimmo & Cook, Samantha, 2013. "SinkRank: An algorithm for identifying systemically important banks in payment systems," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-27.
  11. Stefan Thurner & Sebastian Poledna, 2013. "DebtRank-transparency: Controlling systemic risk in financial networks," Papers 1301.6115, arXiv.org.
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