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Systemic Risk on the Interbank Market

35 Pages Posted: 6 Feb 2001  

Giulia Iori

City University London - Department of Economics

Saqib Jafarey

University of Liverpool Management School (ULMS) - Economics Division

Francesco Padilla

King's College London

Date Written: September 2004

Abstract

We simulate interbank lending. Each bank faces fluctuations in liquid assets and stochastic investment opportunities which mature with delay. This creates the risk of liquidity shortages. An interbank market lets participants pool this risk but also creates the potential for one bank's crisis to propagate through the system. We study banking systems with homogeneous banks, as well as systems in which banks are heterogeneous. With homogeneous banks, an interbank market unambiguously stabilizes the system. With heterogeneity, knock-on effects become possible but the stabilizing role of interbank lending remains so that the interbank market can play an ambiguous role.

Keywords: Systemic risk, contagion, interbank lending

JEL Classification: E5, G21

Suggested Citation

Iori, Giulia and Jafarey, Saqib and Padilla, Francesco, Systemic Risk on the Interbank Market (September 2004). Available at SSRN: https://ssrn.com/abstract=258808 or http://dx.doi.org/10.2139/ssrn.258808

Giulia Iori (Contact Author)

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Saqib Jafarey

University of Liverpool Management School (ULMS) - Economics Division ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom

Francesco Padilla

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

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