Bank Networks: Contagion, Systemic Risk and Prudential Policy

@inproceedings{Aldasoro2017BankNC,
  title={Bank Networks: Contagion, Systemic Risk and Prudential Policy},
  author={I{\~n}aki Aldasoro and Domenico Delli Gatti and Ester Faia},
  year={2017}
}
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. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale… CONTINUE READING
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