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Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank (1999)
| Citations: | 203 - 11 self |
BibTeX
@MISC{Freixas99systemicrisk,,
author = {Xavier Freixas and Bruno Parigi and Jean-charles Rochet},
title = {Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank },
year = {1999}
}
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Abstract
We model systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure (gridlock equilibrium) even if all banks are solvent. When one bank is insolvent, the stability of the banking system is a¤ected in various ways depending on the patterns of payments across locations. We investigate the ability of the banking industry to withstand the insolvency of one bank and whether the closure of one bank generates a chain reaction on the rest of the system. We analyze the coordinating role of the Central Bank in preventing payments systemic repercussions and we examine the justi…cation of the Too-big-to-fail-policy.
Keyphrases
systemic risk central bank liquidity provision interbank relation interbank market banking industry houblon-norman fellow liquidity need interbank credit line justi cation coordination failure various way banking system payment systemic repercussion gridlock equilibrium chain reaction liquidity shock
