Epidemics of liquidity shortages in interbank markets

Brandi, Giuseppe; Clemente, Riccardo Di; Cimini, Giulio

doi:10.1016/j.physa.2018.05.104

Cited by 22 publications

(31 citation statements)

References 80 publications

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“…Regardless of the measure one employs, real interbank networks tend to display a substantial amount of reciprocity. Figure 1 reports the value of r for the Euro-area e-MID market (Brandi et al, 2016), and of ρ for a sample of large bilateral liability exposures among German banks (Roukny et al, 2014), in both cases measured at a quarterly frequency over the time span 2002:Q1-2012:Q3. While the degree of reciprocity observed in these interbank markets has decreased in the aftermath of the 2007-09 global financial crisis, the scope for closing down possible channels of contagion through the bilateral netting of mutual exposures appears significant.…”

Section: Netting As a Systemic Crisis Management Toolmentioning

confidence: 99%

Bilateral Netting and Systemic Liquidity Shortages in Banking Networks

2018

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The cross holding of interbank deposits represents an optimal ex-ante coinsurance arrangement whenever the uncertainty concerning banks' liquidity needs is idiosyncratic and imperfectly correlated. When a shock to aggregate liquidity demand occurs, however, such an arrangement could be detrimentaldepending on the topological structure of interlinkages-as financial exposures become a means to spread risk. If the ex-post facto is an excess demand for liquidity, therefore, regulators could severe potential channels of contagion by forcing banks to net their mutual debt obligations. Starting from these premises we employ simulation techniques with simple interbank structures to obtain two results. First, a state-contingent mandatory policy to bilaterally net mutual interbank exposures comes with a trade-off between the benefits of thwarting the channels of contagion and the harms of a greater concentration of the remaining netted expositions. Second, the balance between the two prongs of the trade-off depends on the metric used by regulators to define financial stability and the topological structure characterizing the interbank market.

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Section: Netting As a Systemic Crisis Management Toolmentioning

confidence: 99%

Bilateral Netting and Systemic Liquidity Shortages in Banking Networks

2018

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“…This work belongs to this line of research, by proposing an effective model for the propagation of liquidity shocks as an epidemic disease spreading over the interbank market network (Toivanen 2013;Philippas et al 2015;Brandi et al 2018). To this end, we have adapted the classical susceptible-infected (SI) compartment models of epidemiology to the framework of funding and market liquidity contagion.…”

Section: Introductionmentioning

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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“…e rst approach is epidemiological and assumes that losses propagate through a market following an epidemic disease pattern. e asset loss or liquidity shortage experienced by a nancial institution or economic agent is treated as an infected state in a classical SIR (Susceptible-Infected-Recovered) model [20][21][22][23][24] that assumes the infection spreads with a given probability to susceptible or healthy institutions and agents. e second approach uses the overload model in which each node (each economic agent) is assigned an asset state based on its simplied balance sheet.…”

Section: Introductionmentioning

confidence: 99%

Modeling Risk Contagion in the Venture Capital Market: A Multilayer Network Approach

et al. 2019

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Venture capital plays a critical role in spurring innovation, encouraging entrepreneurship, and generating wealth. As a part of the financial market, venture capital is affected by market downturns and economic cycles, but it also creates bubbles that negatively impact the economy and social stability. Although the venture capital market is a potential source of systemic risk, there has been little study of its contagion risk mechanism, or how the failure of a single market participant can threaten systemic stability. We use a multilayer network analysis to model the risk contagion in a venture capital market when an external shock impacts a venture capital firm or start-up company in order to understand how risk can spread through connections between market participants and harm total market robustness. We use our model to describe both the direct and indirect channels in the venture capital market that propagates risk and loss. Using real data from the worldwide venture capital market, we find that the venture capital market exhibits the same “robust-yet-fragile” feature as other financial systems. The coupling effect of direct and indirect risk contagions can cause abrupt transitions and large-scale damage even when the turbulence is minor. We also find that the network structure, connectivity, and cash position distribution of market participants impact market robustness. Our study complements other emerging research on measuring systemic risk through multiple connections among market players and on the feedback risk contagion between the financial industry and the real economy.

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Epidemics of liquidity shortages in interbank markets

Cited by 22 publications

References 80 publications

Bilateral Netting and Systemic Liquidity Shortages in Banking Networks

Bilateral Netting and Systemic Liquidity Shortages in Banking Networks

Systemic liquidity contagion in the European interbank market

Modeling Risk Contagion in the Venture Capital Market: A Multilayer Network Approach

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