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Liquidity and Solvency Shocks in a Network Model of Systemic Risk: The Impact of Minimum Capital and Reserve Requirements

38 Pages Posted: 22 Aug 2012 Last revised: 20 Nov 2012

Andreas Krause

University of Bath

Simone Giansante

University of Bath - School of Management

Date Written: August 19, 2012

Abstract

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 e ective than common minimum requirements for all banks.

Keywords: interbank loans, network topology, banking crises, bank failure, banking regulation

Suggested Citation

Krause, Andreas and Giansante, Simone, Liquidity and Solvency Shocks in a Network Model of Systemic Risk: The Impact of Minimum Capital and Reserve Requirements (August 19, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2132152 or http://dx.doi.org/10.2139/ssrn.2132152

Andreas Krause

University of Bath ( email )

Claverton Down
Bath BA2 7AY
United Kingdom
+44 1225 383771 (Phone)
+44 1225 386473 (Fax)

HOME PAGE: http://www.bath.ac.uk/~mnsak/

Simone Giansante (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://people.bath.ac.uk/sg473/index.html

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