Journal Of Network Theory In Finance

Risk.net

How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation

Matteo Serri, Guido Caldarelli and Giulio Cimini

  • The authors develop a network-based ABM to study the stability of the interbank market. 
  • Before 2008, a systemic crisis is hardly triggered but leads to a total market crash.
  • After 2008, a crisis is easier to occur but part of the system survives to it.

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.

To continue reading...

You must be signed in to use this feature.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: