Simulating Fire Sales in a System of Banks and Asset Managers

61 Pages Posted: 20 Feb 2020

See all articles by Susanna Calimani

Susanna Calimani

European Central Bank (ECB)

Grzegorz Hałaj

Government of Canada - Bank of Canada

Dawid Żochowski

European Central Bank

Date Written: February, 2020

Abstract

We develop an agent-based model of traditional banks and asset managers to investigate the contagion risk related to fire sales and balance sheet interactions. We take a structural approach to the price formation in fire sales as in Bluhm et al. (2014) and introduce a market clearing mechanism with endogenous formation of asset prices. We find that, first, banks which are active in both the interbank and securities markets may channel financial distress between the two markets. Second, while higher bank capital requirements decrease default risk and funding costs, they make it also more profitable to invest into less-liquid assets financed by interbank borrowing. Third, asset managers absorb small liquidity shocks, but they exacerbate contagion when their voluntary liquid buffers are fully utilised. Fourth, a system with larger and more interconnected agents is more prone to contagion risk stemming from funding shocks.

Keywords: agent-based model, asset managers, contagion, fire sales, systemic risk

JEL Classification: C6, G21, G23

Suggested Citation

Calimani, Susanna and Hałaj, Grzegorz and Żochowski, Dawid, Simulating Fire Sales in a System of Banks and Asset Managers (February, 2020). ECB Working Paper No. 2373, Available at SSRN: https://ssrn.com/abstract=3540972

Susanna Calimani (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Grzegorz Hałaj

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Dawid Żochowski

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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