Funding Liquidity Risk in a Quantitative Model of Systemic Stability

39 Pages Posted: 17 Jun 2009

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Piergiorgio Alessandri

Bank of England

Bruno Eklund

HSBC (London)

Prasanna Gai

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Elizabeth Martin

Bank of England

Nada Mora

Federal Reserve Banks - Federal Reserve Bank of Richmond

Gabriel Sterne

Bank of England

Matthew Willison

Bank of England

Date Written: June 15, 2009

Abstract

We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is known as RAMSI and is still in its development phase. It 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 profiles and confidence may trigger the outright closure of funding markets to particular institutions. In presenting results, we focus on 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, contagion

JEL Classification: G01, G21, G32

Suggested Citation

Aikman, David and Alessandri, Piergiorgio and Eklund, Bruno and Gai, Prasanna and Kapadia, Sujit and Martin, Elizabeth and Mora, Nada and Sterne, Gabriel and Willison, Matthew, Funding Liquidity Risk in a Quantitative Model of Systemic Stability (June 15, 2009). Bank of England Working Paper No. 372. Available at SSRN: https://ssrn.com/abstract=1420062 or http://dx.doi.org/10.2139/ssrn.1420062

David Aikman

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Piergiorgio Alessandri

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bruno Eklund

HSBC (London) ( email )

16th Floor, 8 Canada Square
Canary Wharf
London, E14 5HQ
United Kingdom

Prasanna Gai

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
+020 7601 3583 (Phone)

Sujit Kapadia (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

Elizabeth Martin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Nada Mora

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Gabriel Sterne

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Matthew Willison

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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