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

See all articles by Gabriele Tedeschi

Gabriele Tedeschi

Università Politecnica delle Marche - Faculty of Economics; Jaume I University - Department of Economics

Amin Mazloumian

ETH Zürich

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Dirk Helbing

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS)

Date Written: May 5, 2014

Abstract

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

Tedeschi, Gabriele and Mazloumian, Amin and Gallegati, Mauro and Helbing, Dirk, Bankruptcy Cascades in Interbank Markets (May 5, 2014). 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. Available at SSRN: https://ssrn.com/abstract=2432849

Gabriele Tedeschi

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Jaume I University - Department of Economics ( email )

Campus del Riu Sec.
E-12071 Castellon
Spain

Amin Mazloumian

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

Dirk Helbing (Contact Author)

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS) ( email )

ETH Zurich - Swiss Federal Institute of Technology
Clausiusstrasse 50
Zurich, 8092
Switzerland

HOME PAGE: http://www.coss.ethz.ch

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