Interbank lending and the spread of bank failures:a network model of systemic risk


Krause, A. and Giansante, S., 2012. Interbank lending and the spread of bank failures:a network model of systemic risk. Journal of Economic Behavior and Organization, 83 (3), 583– 608.

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    We model a stylized banking system where banks are characterized by the amount of capital, cash reserves and their exposure to the interbank loan market as borrowers as well as lenders. A network of interbank lending is established that is used as a transmission mechanism for the failure of banks through the system. We trigger a potential banking crisis by exogenously failing a bank and investigate the spread of this failure within the banking system. We find the obvious result that the size of the bank initially failing is the dominant factor whether contagion occurs, but for the extent of its spread the characteristics of the network of interbank loans are most important. These results have implications for the regulation of banking systems that are briefly discussed, most notably that a reliance on balance sheet regulations is not suffcient but must be supplemented by considerations for the structure of financial linkages between banks.


    Item Type Articles
    CreatorsKrause, A.and Giansante, S.
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    Uncontrolled Keywordsinterbank loans,banking crises,systemic risk,network topology,tiering,“too big to fail”
    DepartmentsSchool of Management
    Research CentresCentre for Mathematical Biology
    Publisher StatementGiansante_JEBO_2012_ii.pdf: “NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Behavior & Organization. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Behavior & Organization, vol 83, issue 3, 2012, DOI 10.1016/j.jebo.2012.05.015
    ID Code30033


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