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Pandemic crises in financial systems: a simulation-model to complement stress-testing frameworks

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  • J. Idier
  • T. Piquard

Abstract

We propose in this paper a simulation framework of pandemic in financial system composed of banks, asset markets and interbank markets. This framework aims at complementing the usual stress-test strategies that evaluate the impact of shocks on individual balance-sheets without taking into account the interactions between several components of the financial system. We build on the network model of Gourieroux, Heam, and Monfort (2012) for the banking system, adding some asset market channels as in Greenwood, Landier, and Thesmar (2015) and interbank markets characterized by collateralized debt and margin calls. We show that rather small shocks can be amplified and destabilize the entire financial system. In our framework, the fact that the system enters in an adverse situation comes from first round losses amplification triggered by asset depreciation, interbank contraction and bank failures in chain. From our simulations, we explain how the different channels of transmission play a role in weakening the financial system, and measure the extent to which each channel could make banks more vulnerable.

Suggested Citation

  • J. Idier & T. Piquard, 2017. "Pandemic crises in financial systems: a simulation-model to complement stress-testing frameworks," Working papers 621, Banque de France.
    • Handle: RePEc:bfr:banfra:621
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    References listed on IDEAS

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    2. T. Bennani & C. Couaillier & A. Devulder & S. Gabrieli & J. Idier & P. Lopez & T. Piquard & V. Scalone, 2017. "An analytical framework to calibrate macroprudential policy," Working papers 648, Banque de France.

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    More about this item

    Keywords

    Bank network; systemic risk; contagion; stress-testing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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