How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation
Authored by Giulio Cimini, Matteo Serri, Guido Caldarelli
Date Published: 2017
DOI: 10.21314/jntf.2017.025
Sponsors:
European Union
Platforms:
No platforms listed
Model Documentation:
Other Narrative
Mathematical description
Model Code URLs:
Model code not found
Abstract
Assessing the stability of economic systems is a fundamental research
focus in economics that has become increasingly interdisciplinary in the
currently troubled economic climate. In particular, much attention has
been devoted to the interbank lending market as an important diffusion
channel for financial distress during the recent crisis. In this paper,
we study the stability of the interbank market to exogenous shocks using
an agent-based network framework. Our model encompasses several
ingredients that have been recognized in the literature as procyclical
triggers of financial distress in the banking system: credit and
liquidity shocks through bilateral exposures, liquidity hoarding due to
counterparty creditworthiness deterioration, target leveraging policies
and fire-sale spillovers. However, we exclude the possibility of central
authorities intervention. We implement this framework on a data set of
183 European banks that were publicly traded between 2004 and 2013. We
document the extreme fragility of the interbank lending market up to
2008, when a systemic crisis leads to total depletion of market equity
with an increasing speed of market collapse. After 2008, the system is
more resilient to systemic events in terms of residual market equity.
However, the speed at which a crisis breaks out reaches a new maximum in
2011, and it never returns to the values observed before 2007. Our
analysis points to the key role that crisis outbreak speed plays: it
sets the maximum delay for central authorities intervention to be
effective.
Tags
Agent-based models
Liquidity
Risk
Systemic risk
Contagion
Prices
Financial networks
Shocks
Financial contagion
Interbank
lending market
Banking system