Liquidity and Solvency Shocks in a Network Model of Systemic Risk: The Impact of Minimum Capital and Reserve Requirements
University of Bath
University of Bath - School of Management
August 19, 2012
25th Australasian Finance and Banking Conference 2012
We analyze the impact minimal capital and reserve requirements have on bank failures arising from solvency and liquidity shortages in a banking system where banks are characterized by the amount of capital, cash reserves and their exposure to the interbank loan market as borrowers as well as lenders. A network of interbank lending is established that is used as a transmission mechanism for the failure of banks through the system. We find that the impact of minimum capital and reserve requirements is small and excess holdings work to a similar degree, suggesting that targeting capital requirements more carefully on specific banks can be more eective than common minimum requirements for all banks.
Number of Pages in PDF File: 38
Keywords: interbank loans, network topology, banking crises, bank failure, banking regulation
Date posted: August 22, 2012 ; Last revised: November 20, 2012
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