Systemic Risk in an Interconnected Banking System with Endogenous Asset Markets

SAFE Working Paper No. 48

50 Pages Posted: 8 Apr 2014

See all articles by Marcel Bluhm

Marcel Bluhm

Wang Yanan Institute for Studies in Economics; Center for Financial Studies

Jan Pieter Krahnen

Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Center for Financial Studies (CFS); Centre for Economic Policy Research (CEPR)

Date Written: March 30, 2014

Abstract

We analyze the emergence of systemic risk in a network model of interconnected bank balance sheets. The model incorporates multiple sources of systemic risk, including size of financial institutions, direct exposure from interbank lendings, and asset fire sales. We suggest a new macroprudential risk management approach building on a system wide value at risk (SVaR). Under the SVaR metric, the contribution of individual banks to systemic risk is well defined and can be approximated by a Shapley value-type measure. We show that, in a SVaR regime, a fair systemic risk charge which is proportional to a bank's individual contribution to systemic risk diverges from the optimal macroprudential capitalization of the banks from a planner's perspective. The results have implications for the design of macroprudential capital surcharges.

Keywords: systemic risk, systemic risk charge, macroprudential supervision, Shapley value, financial network

JEL Classification: C15, G01, G21, G28

Suggested Citation

Bluhm, Marcel and Krahnen, Jan Pieter, Systemic Risk in an Interconnected Banking System with Endogenous Asset Markets (March 30, 2014). SAFE Working Paper No. 48. Available at SSRN: https://ssrn.com/abstract=2421265 or http://dx.doi.org/10.2139/ssrn.2421265

Marcel Bluhm (Contact Author)

Wang Yanan Institute for Studies in Economics ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

Center for Financial Studies ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Jan Pieter Krahnen

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30080 (Phone)
+49 69 798 30077 (Fax)

Center for Financial Studies (CFS) ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30050 (Phone)
+49 69 798 30077 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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