Domino Effects when Banks Hoard Liquidity: The French network
We investigate the consequences of banks' liquidity hoarding behaviour for the stability of the financial system by proposing a new model of banking contagion through two channels, bilateral exposures and funding shortage. Inspired by the key role of liquidity hoarding in the 2007-2009 financial crisis, we incorporate banks' hoarding behaviour in a standard Iterative Default Cascade algorithm to compute the propagation of a common market shock through a banking system. In addition to potential solvency contagion, a market shock leads to banks liquidity hoarding that may generate problems of short-term funding for other banks. As an empirical exercise, we apply this model to the French banking system. Relying on data on banks bilateral exposures collected by France' Prudential Supervisory Authority, the French banking sector appears resilient to the combination of an initial market shock (losses on marked-to-market assets) and the resulting solvency and liquidity contagion. Moreover, the model gauges the relative weight of the various factors in the total loss.
|Date of creation:||2013|
|Contact details of provider:|| Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS|
Web page: http://www.banque-france.fr/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Acharya, Viral V. & Skeie, David, 2011.
"A model of liquidity hoarding and term premia in inter-bank markets,"
Journal of Monetary Economics,
Elsevier, vol. 58(5), pages 436-447.
- Acharya, Viral V & Skeie, David, 2011. "A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets," CEPR Discussion Papers 8705, C.E.P.R. Discussion Papers.
- Viral V. Acharya & David R. Skeie, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Staff Reports 498, Federal Reserve Bank of New York.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2002.
"Risk Assessment for Banking Systems,"
79, Oesterreichische Nationalbank (Austrian Central Bank).
- James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
- Paolo Emilio Mistrulli, 2007.
"Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns,"
Temi di discussione (Economic working papers)
641, Bank of Italy, Economic Research and International Relations Area.
- Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
- Lelyveld, Iman van & Liedorp, Franka, 2006.
"Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis,"
806, University Library of Munich, Germany.
- Iman van Lelyveld & Franka Liedorp, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
- Toivanen, Mervi, 2009. "Financial interlinkages and risk of contagion in the Finnish interbank market," Research Discussion Papers 6/2009, Bank of Finland.
- C. Gouriéroux & J.-C. Héam & A. Monfort, 2012.
"Bilateral exposures and systemic solvency risk,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 45(4), pages 1273-1309, November.
- Christian Upper & Andreas Worms, 2001.
"Estimating bilateral exposures in the German interbank market: is there a danger of contagion?,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229
Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
- Christian Gouriéroux & Jean-Cyprien Heam & Alain Monfort, 2013.
"Liquidation Equilibrium with Seniority and Hidden CDO,"
2013-06, Centre de Recherche en Economie et Statistique.
- Gourieroux, C. & Heam, J.C. & Monfort, A., 2013. "Liquidation equilibrium with seniority and hidden CDO," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5261-5274.
- repec:dau:papers:123456789/14977 is not listed on IDEAS
- 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.
- Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
- Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006.
"Using Market Information for Banking System Risk Assessment,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 2(1), March.
- Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
- repec:dau:papers:123456789/14967 is not listed on IDEAS
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- International Monetary Fund., 2012. "France; Financial System Stability Assessment," IMF Staff Country Reports 12/341, International Monetary Fund.
- Matteo Barigozzi & Giorgio Fagiolo & Diego Garlaschelli, 2009. "Multinetwork of international trade: A commodity-specific analysis," Papers 0908.1879, arXiv.org, revised Jun 2010.
When requesting a correction, please mention this item's handle: RePEc:bfr:banfra:432. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart)
If references are entirely missing, you can add them using this form.