From Banks' Strategies to Financial (In)Stability

23 Pages Posted: 4 Aug 2015

See all articles by Simone Berardi

Simone Berardi

Jaume I University

Gabriele Tedeschi

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

Date Written: August 3, 2015

Abstract

This paper aims to shed light on the emergence of systemic risk in credit systems. By developing an interbank market with heterogeneous financial institutions granting loans on different network structures, we investigate what market architecture is more resilient to liquidity shocks and how the risk spreads over the modeled system. In our model, credit linkages evolve endogenously via a fitness measure based on different banks' strategies. Each financial institution, in fact, applies a strategy based on a low interest rate, a high supply of liquidity or a combination of them. Interestingly, the choice of the strategy influences both the banks' performance and the network topology. In this way, we are able to identify the most effective tactics adapt to contain contagion and the corresponding network topology. Our analysis shows that, when financial institutions combine the two strategies, the interbank network does not condense and this generates the most efficient scenario in case of shocks.

Keywords: Interbank market, dynamic network, fitness model, network resilience, bank strategy

JEL Classification: G01, G02, D85

Suggested Citation

Berardi, Simone and Tedeschi, Gabriele, From Banks' Strategies to Financial (In)Stability (August 3, 2015). Available at SSRN: https://ssrn.com/abstract=2639272 or http://dx.doi.org/10.2139/ssrn.2639272

Simone Berardi

Jaume I University ( email )

Castellon
E-12071 Castello de la Plana
Spain

Gabriele Tedeschi (Contact Author)

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

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