Date:
Wednesday 24th September 2014 - 16:30 to 17:15
Venue:
INI Seminar Room 1
Session Title:
Funding Liquidity and Systemic Risk
Abstract:
In the aftermath of the financial crisis, stress-testing has become
mandatory for banks. We propose a tractable model at the frontier of
systemic risk stress-testing. Our theoretically-based stress-testing
framework integrates credit risk, liquidity risk and contagion risk.
We contribute to the literature in different ways. We first generalize
the theoretical contagion results of Manz (2010) to an N-banks world,
show the uniqueness and existence of an equilibrium in that context,
and characterize the contagion dynamics. We then quantify the
potential important contribution of information contagion to systemic
risk and illustrates why ensuring that each bank is liquid when
considered in isolation is not enough. Each bank must also be
sufficiently liquid to resist to contagion effects. Finally, we
illustrates how crucial are market participants' beliefs about an
eventual central bank intervention in the unfolding of events when the
financial system is in a fragile state.
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