Bankruptcy Cascades in Interbank Markets
Tedeschi G, Mazloumian A, Gallegati M, Helbing D (2012) Bankruptcy Cascades in Interbank Markets. PLoS ONE 7(12): e52749. doi:10.1371/journal.pone.0052749
10 Pages Posted: 5 May 2014
Date Written: May 5, 2014
We study a credit network and, in particular, an interbank system with an agent-based model. To understand the relationship between business cycles and cascades of bankruptcies, we model a three-sector economy with goods, credit and interbank market. In the interbank market, the participating banks share the risk of bad debits, which may potentially spread a bank’s liquidity problems through the network of banks. Our agent-based model sheds light on the correlation between bankruptcy cascades and the endogenous economic cycle of booms and recessions. It also demonstrates the serious trade-off between, on the one hand, reducing risks of individual banks by sharing them and, on the other hand, creating systemic risks through credit-related interlinkages of banks. As a result of our study, the dynamics underlying the meltdown of financial markets in 2008 becomes much better understandable.
Keywords: credit network, bankruptcy, cascade effect, interbank market
Suggested Citation: Suggested Citation