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Funding liquidity risk in a quantitative model of systemic stability

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Aikman, David & Alessandri, Piergiorgio & Eklund, Bruno & Gai, Prasanna & Kapadia, Sujit & Martin, Elizabeth & Mora, Nada & Sterne, Gabriel & Willison, Matthew, 2009. "Funding liquidity risk in a quantitative model of systemic stability," Bank of England working papers 372, Bank of England.
    • Handle: RePEc:boe:boeewp:0372
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    More about this item

    Keywords

    Systemic risk; financial stability models; funding liquidity risk; contagion;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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