Fire sales turn a crash into a crisis, simulation shows

‘More realistic’ core-periphery model leads to wipeout of network if several nodal banks default

Fire sale

Fire sales of assets by stressed banks could be more important than the structure of banking networks in spreading a systemic crisis, a new simulation shows.

Asset price drops are not transmitted through the existing interbank financing network, but instead affect every bank simultaneously. As a result, the simulation finds they could cause the failure of up to 17 times as many banks as would be brought down by interbank defaults alone.

“More and more articles are arriving at this conclusion:

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