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Funding liquidity risk in a quantitative model of systemic stability

  • Aikman, David

    ()

    (Bank of England)

  • Alessandri, Piergiorgio

    ()

    (Bank of England)

  • Eklund, Bruno

    ()

    (Bank of England)

  • Gai, Prasanna

    ()

    (Australian National University)

  • Kapadia, Sujit

    ()

    (Bank of England)

  • Martin, Elizabeth

    ()

    (Bank of England)

  • Mora, Nada

    ()

    (Federal Reserve Bank of Kansas City)

  • Sterne, Gabriel

    ()

    (Bank of England)

  • Willison, Matthew

    ()

    (Bank of England)

We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is known as RAMSI and is still in its development phase. It 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 profiles and confidence may trigger the outright closure of funding markets to particular institutions. In presenting results, we focus on 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.

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Paper provided by Bank of England in its series Bank of England working papers with number 372.

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Length: 39 pages
Date of creation: 15 Jun 2009
Date of revision:
Handle: RePEc:boe:boeewp:0372
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