Comment on 'Liquidity Risk, Cash Flow Constraints, and Systemic Feedbacks'

Abstract

The paper describes a liquidity feedback model (LFM) within a quantitative framework of systemic risk. LFM simulates balance sheets and funding interactions of a population of banks within a financial system to assess shock-induced feedback effects on the individual banks and the represented financial system. The model represents the systemic interactions through five contagion channels and analyzes collapse mechanics in a financial system due to propagation of liquidity risk through bank balance sheets. LFM offers a well thought out analysis of the mechanics of cash flow constraints and liquidity effects and institutional actions and reactions through a set of network relationships.