Interbank Lending, reserve requirements and systemic risk
We simulate a model of an interbank market. Each bank faces fluctuations in deposits and a stochastic investment opportunity each period. Invested funds mature with delay. The risk arises of failure due to insufficient liquidity. An interbank market lets participants pool this risk but also creates the potential for one bank's failure to lead to an epidemic of further failures. With homogeneous banks, contagion effects are small and a wider interbank network leads to more stability. When banks differ in liquidity risk or in size, contagion effects become more important. Widening the interbank market can then lead both to episodes of systemic collapse and a larger overall incidence of bank failures.
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|Date of creation:||01 Apr 2001|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html|
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