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Bank Networks: Contagion, Systemic Risk and Prudential Policy

Presented by: 
E Faia Goethe-Universität Frankfurt
Date: 
Monday 15th December 2014 - 16:00 to 16:45
Venue: 
INI Seminar Room 1
Abstract: 
Co-authors: Inaki Aldasoro (Goethe University Frankfurt), Domenico Delli Gatti (Catholic University Milan)

We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Clearing takes place through a price tâtonnement mechanism, while traded quantities ate obtained through three alternative matching algorithms: Maximum Entropy, Closest matching and Random matching. Contagion occurs through liquidity hoarding, interbank interconnections and fire sale externalities. The resulting network configurations exhibits core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance with network centrality and input-output metrics and systemic risk with Shapley values. Given the realm of our network we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.

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University of Cambridge Research Councils UK
    Clay Mathematics Institute London Mathematical Society NM Rothschild and Sons