Contagion-Based Safety Premium in Bank Networks

59 Pages Posted: 16 Dec 2024

See all articles by Zhongjie Fan

Zhongjie Fan

University of International Business and Economics

Ping He

Tsinghua University, SEM

Zehao Liu

Renmin University of China - School of Finance

Abstract

We study the impact of network structures on ffnancial contagion and safety premiums in a model with collateralized lending and fully endogenized loan sizes. Safety premiums exist because safe assets help to deter the contagion of defaults. Only in bank networks containing directed cycles, can multiple equilibria featuring different sizes of loans emerge, and a small negative shock to collateral quality might disproportionately decrease the amount of interbank lending and increase safety premiums. A higher network density enhances both ffnancial contagion andrisk-sharing. Finally, safety premiums are higher in a core-periphery network than that in a complete network.

Keywords: Safety Premium, Network, Financial contagion, Collateral, Multiple Equilibria

Suggested Citation

Fan, Zhongjie and He, Ping and Liu, Zehao, Contagion-Based Safety Premium in Bank Networks. Available at SSRN: https://ssrn.com/abstract=5059284 or http://dx.doi.org/10.2139/ssrn.5059284

Zhongjie Fan

University of International Business and Economics ( email )

10 Huixindongjie, Chaoyang District
Beijing, 100029
China

Ping He (Contact Author)

Tsinghua University, SEM ( email )

Beijing, 100084
China
8610-62795754 (Phone)
8610-62784554 (Fax)

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/heping

Zehao Liu

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

HOME PAGE: http://sites.google.com/view/zehaoliu/home

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