Can banks default overnight? Modelling endogenous contagion on the O/N interbank market

Smaga, Paweł; Wilinski, Mateusz; Ochnicki, Piotr; Arendarski, Piotr; Gubiec, Tomasz

doi:10.1080/14697688.2018.1438641

Cited by 10 publications

(13 citation statements)

References 77 publications

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“…Based on this argument, we use compartmental models that allow the simplification of the contagion dynamics so that few assumptions on the contagion and transmission parameters are required. Those models are particularly useful when the full set of data necessary to run more specialized and sophisticated models is not available (Cont et al, 2019;Greenwood et al, 2015;Manna and Schiavone, 2012;Smaga et al, 2015). In fact, effective contagion models require not only the real underlying network but also their complexity demands balance sheet data with sufficient granularity and other economic data which are hardly available.…”

Section: Submittedmentioning

confidence: 99%

Systemic liquidity contagion in the European interbank market

Macchiati,

Brandi,

Cimini

et al. 2019

Preprint

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Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly available. Alternatively, risk analyses on interbank networks have been done via centrality measures of the underlying graph capturing the most interconnected and hence more prone to risk spreading banks. In this paper, we propose a model which relies on an epidemic model which simulate a contagion on the interbank market using the funding liquidity shortage mechanism as contagion process. The model is enriched with country and bank risk features which take into account the heterogeneity of the interbank market. The proposed model is particularly useful when full set of data necessary to run specialized models is not available. Since the interbank network is not fully available, an economic driven reconstruction method is also proposed to retrieve the interbank network by constraining the standard reconstruction methodology to real financial indicators. We show that the contagion model is able to reproduce systemic liquidity risk across different years and countries. This result suggests that the proposed model can be successfully used as a valid alternative to more complex ones.

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Section: Submittedmentioning

confidence: 99%

Systemic liquidity contagion in the European interbank market

Macchiati,

Brandi,

Cimini

et al. 2019

Preprint

View full text Add to dashboard Cite

show abstract

“…Both these ingredients require only aggregate balance sheet information, as well as a few model assumptions and parameters, similarly to, e.g., the approaches by Eisenberg and Noe (2001) and Battiston et al (2012) that deal with solvency contagion. Data requirement in particular is indeed a major advantage of our model with respect to more sophisticated approaches (Krause and Giansante 2012;Manna and Schiavone 2012;Aldasoro et al 2017;Halaj 2018;Smaga et al 2018;Teply and Klinger 2019;Cont et al 2020), which require not only more specific balance sheet variables (for instance, exposures split according to the seniority or type of contract-repurchase agreements, derivatives, CDS, and so on) with high time resolution, but also several assumptions to define an agent-based response of banks to shocks.…”

Section: Introductionmentioning

confidence: 99%

“…A notable exception is the case of Northern Rock that defaulted in 2012 due to funding liquidity cuts in the interbank market and bank run. Indeed, systemic defaults in the interbank market seem to be possible even due to cash fluctuations alone(Smaga et al 2018). In any event, assessing systemic risk in the interbank market is important because of its interplay with other channels of contagion(Hüser 2015).…”

mentioning

confidence: 99%

Systemic liquidity contagion in the European interbank market

Macchiati

Brandi

Cimini

et al. 2021

J Econ Interact Coord

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Systemic liquidity risk, defined by the International Monetary Fund as “the risk of simultaneous liquidity difficulties at multiple financial institutions,” is a key topic in financial stability studies and macroprudential policy-making. In this context, the complex web of interconnections of the interbank market plays the crucial role of allowing funding liquidity shortages to propagate between financial institutions. Here, we introduce a simple yet effective model of the interbank market in which liquidity shortages propagate through an epidemic-like contagion mechanism on the network of interbank loans. The model is defined by using aggregate balance sheet information of European banks, and it exploits country and bank-specific risk features to account for the heterogeneity of financial institutions. Moreover, in order to obtain the European-wide topology of the interbank network, we define a block reconstruction method based on the exchange flows between the various countries. We show that the proposed contagion model is able to estimate systemic liquidity risk across different years and countries. Results suggest that our effective contagion approach can be successfully used as a viable alternative to more realistic but complicated models, which not only require more specific balance sheet variables with high time resolution but also need assumptions on how banks respond to liquidity shocks.

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“…Moreover, the recently introduced macro-prudential policies have tended to rely on network models to estimate the possible impact of their implementation [5,6]. e studies on network models of financial contagion have also been growing into a large body of works, which consists of the following main streams: credit default contagion [7,8], common asset contagion [9,10], and funding liquidity contagion [11][12][13].…”

Section: Introductionmentioning

confidence: 99%

Contagion Risks and Systemic Stability in Financial Networks

Tian

Wang

Liu

et al. 2021

Mathematical Problems in Engineering

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An agent-based model is proposed, constructing an evolutionary banking system, where interbank loans and investment strategies are, respectively, determined by liquidity shortage and utility maximization. The causes of systemic risk are then explored based on the evolutionary banking system, which is calibrated by a sample from China. The regulatory interventions indicate the positive effects of increased investment assets, while the negative but inappreciable effects of increased interbank counterparties on contagion risks decrease. This observation hints at the possibility of promoting systemic stability by incentivizing more diversifications in investment assets instead of interbank counterparties. The results also demonstrate the advantages of prudential liquidity requirements, interbank liquidity facilities, and monetary policies from the central bank in promoting banking system stability.

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Can banks default overnight? Modelling endogenous contagion on the O/N interbank market

Cited by 10 publications

References 77 publications

Systemic liquidity contagion in the European interbank market

Systemic liquidity contagion in the European interbank market

Systemic liquidity contagion in the European interbank market

Contagion Risks and Systemic Stability in Financial Networks

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