Funding Liquidity Risk in a Quantitative Model of Systemic Stability
37 Pages Posted: 16 Feb 2009
Date Written: February, 16 2009
We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profile and confidence may trigger the outright closure of funding markets. In presenting results, we focus on how policymakers could use the model with reference to both aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side feedbacks, leading to system-wide instability.
Keywords: Systemic Risk, Financial Stability Models, Funding Liquidity Risk
JEL Classification: G21, G32
Suggested Citation: Suggested Citation