The Effect of the Interbank Network Structure on Contagion and Common Shocks

52 Pages Posted: 8 Jun 2016

See all articles by Co-Pierre Georg

Co-Pierre Georg

University of Cape Town; Deutsche Bundesbank

Date Written: 2011

Abstract

This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require different optimal policy responses.

Keywords: systemic risk, contagion, common shocks, multi-agent simulations

JEL Classification: C63, E52, G01, G21

Suggested Citation

Georg, Co-Pierre, The Effect of the Interbank Network Structure on Contagion and Common Shocks (2011). Bundesbank Series 2 Discussion Paper No. 2011,12. Available at SSRN: https://ssrn.com/abstract=2794071

Co-Pierre Georg (Contact Author)

University of Cape Town ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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