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Interbank Lending, Reserve Requirements and Systemic Risk

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Abstract

We simulate interbank lending. Each bank faces fluctuations in deposits and stochastic investment opportunities which mature with delay. This creates the risk of liquidity shortages. An interbank market lets participants pool this risk but also creates the potential for one bank's crisis to propagate through the system. We study banking systems with homogeneous banks, as well as systems in which banks are heterogeneous. With homogeneous banks, an interbank market unambiguously stabilises the system. With heterogeneity, knock-on effects become possible but the stabilising role of interbank lending remains so that the interbank market can play an ambiguous role.

Suggested Citation

  • Giulia Iori & Saqib Jafarey & Francisco Padilla, 2003. "Interbank Lending, Reserve Requirements and Systemic Risk," Modeling, Computing, and Mastering Complexity 2003 17, Society for Computational Economics.
  • Handle: RePEc:sce:cplx03:17
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    Cited by:

    1. Dairo Estrada & Daniel Osorio, 2006. "A Market Risk Approach to Liquidity Risk and Financial Contagion," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 24(50), pages 242-271, Junio.
    2. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2007. "Agent-based Models of Financial Markets," Papers physics/0701140, arXiv.org.
    3. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    4. Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.
    5. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2001. "Microscopic Models of Financial Markets," Papers cond-mat/0110354, arXiv.org.
    6. Pawe{l} Smaga & Mateusz Wili'nski & Piotr Ochnicki & Piotr Arendarski & Tomasz Gubiec, 2016. "Can banks default overnight? Modeling endogenous contagion on O/N interbank market," Papers 1603.05142, arXiv.org.
    7. Heather D. Gibson & Stephen G. Hall & George S. Tavlas, 2016. "Measuring Systemic Stress in European Banking Systems," Discussion Papers in Economics 16/19, Department of Economics, University of Leicester.

    More about this item

    Keywords

    Systemic risk; contagion; interbank lending;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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