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http://hdl.handle.net/10419/57342
  
Title:Default risk in an interconnected banking system with endogeneous asset markets PDF Logo
Authors:Bluhm, Marcel
Krahnen, Jan Pieter
Issue Date:2011
Series/Report no.:CFS Working Paper 2011/19
Abstract:This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies.
Subjects:Systemic Risk
Systemic Risk Charge
Systemic Risk Fund
Macroprudential Supervision
Shapley Value
Financial Network
JEL:G01
G18
G33
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-115350
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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