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From banks’ strategies to financial (in)stability

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  • Simone Berardi

    () (Economics Department, Universitat Jaume I, Castellón, Spain)

  • Gabriele Tedeschi

    () (Economics Dept-U. Jaume I & Dip. di Scienze Economiche e Sociali-U. Politecnica delle Marche)

Abstract

This paper aims to shed light on the emergence of systemic risk in credit systems. By developing an interbank market with heterogeneous financial institutions granting loans on different network structures, we investigate what market architecture is more resilient to liquidity shocks and how the risk spreads over the modeled system. In our model, credit linkages evolve endogenously via a fitness measure based on different banks’ strategies. Each financial institution, in fact, applies a strategy based on a low interest rate, a high supply of liquidity or a combination of them. Interestingly, the choice of the strategy influences both the banks’ performance and the network topology. In this way, we are able to identify the most effective tactics adapt to contain contagion and the corresponding network topology. Our analysis shows that, when financial institutions combine the two strategies, the interbank network does not condense and this generates the most efficient scenario in case of shocks.

Suggested Citation

  • Simone Berardi & Gabriele Tedeschi, 2015. "From banks’ strategies to financial (in)stability," Working Papers 2015/11, Economics Department, Universitat Jaume I, Castellón (Spain).
  • Handle: RePEc:jau:wpaper:2015/11
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    Cited by:

    1. Opeoluwa Banwo & Fabio Caccioli & Paul Harrald & Francesca Medda, 2016. "The Effect Of Heterogeneity On Financial Contagion Due To Overlapping Portfolios," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 19(08), pages 1-20, December.
    2. repec:eee:dyncon:v:91:y:2018:i:c:p:257-288 is not listed on IDEAS

    More about this item

    Keywords

    Interbank market; dynamic network; fitness model; network resilience; bank strategy;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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