Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/203292 
Year of Publication: 
2015
Series/Report no.: 
SAFE Working Paper No. 87
Version Description: 
First Draft: January 2014. This Draft: July 2015
Publisher: 
Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe, Frankfurt a. M.
Abstract: 
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. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a coreperiphery structure, dis-assortative behavior and low density. Within this framework 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.
Subjects: 
banking networks
systemic risk
contagion
fire sales
prudential regulation
JEL: 
D85
G21
G28
C63
L14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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