Endogenous Banks' Networks, Cascades and Systemic Risk

SAFE Working Paper No. 12

76 Pages Posted: 20 Mar 2013 Last revised: 4 Jul 2014

See all articles by Marcel Bluhm

Marcel Bluhm

The Block

Ester Faia

Goethe University Frankfurt

Jan Pieter Krahnen

Goethe University Frankfurt

Date Written: June 2014

Abstract

We develop a network model whose links are governed by banks' optimizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in re-sales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by re-sales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks, and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.

Keywords: network formation, tâtonnement, contagion

JEL Classification: C63, D85, G01,G28

Suggested Citation

Bluhm, Marcel and Faia, Ester and Krahnen, Jan Pieter, Endogenous Banks' Networks, Cascades and Systemic Risk (June 2014). SAFE Working Paper No. 12, Available at SSRN: https://ssrn.com/abstract=2235520 or http://dx.doi.org/10.2139/ssrn.2235520

Marcel Bluhm

The Block ( email )

New York
United States

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Jan Pieter Krahnen

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
562
Abstract Views
4,761
Rank
88,648
PlumX Metrics