Interbank Runs: A Network Model of Systemic Liquidity Crunches
50 Pages Posted: 27 Jan 2018 Last revised: 15 Mar 2022
Date Written: March 8, 2022
This paper models systemic liquidity crunches on interbank lending networks, and studies how the network structure affects the instability. Interbank runs are modeled as a coordination failure, in which banks run on banks as they mutually reinforce each other to withdraw interbank lending. A mean-field approximation reduces the complex strategic interactions on networks down to a one-dimensional characterization of the system-wide dynamics. It explains how lending-borrowing relationships not only channel the "ripple'" effects of local shocks, but also connect the whole network into a self-fulfilling "tsunami". I demonstrate applications in network-based systemic risk measurement and management.
Keywords: Networks, Bank Runs, Interbank, Mean-field Approximation, Systemic Risk, Liquidity Crises
JEL Classification: G01, G20, D85
Suggested Citation: Suggested Citation