[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/0586.html
   My bibliography  Save this paper

Systemic illiquidity in the interbank network

Author

Listed:
  • Ferrara, Gerardo

    (Bank of England)

  • Langfield, Sam

    (European Systemic Risk Board and Princeton University)

  • Liu, Zijun

    (Bank of England)

  • Ota, Tomohiro

    (Formerly Bank of England)

Abstract
We study systemic illiquidity using a unique data set on UK banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, we show that systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network.

Suggested Citation

  • Ferrara, Gerardo & Langfield, Sam & Liu, Zijun & Ota, Tomohiro, 2016. "Systemic illiquidity in the interbank network," Bank of England working papers 586, Bank of England, revised 14 Aug 2017.
    • Handle: RePEc:boe:boeewp:0586
    as

    Download full text from publisher

    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2017/systemic-illiquidity-in-the-interbank-network-update.pdf?la=en&hash=9B994FB8DF1726472C8C430F02B544020555BDBC
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ivan Alves & Stijn Ferrari & Pietro Franchini & Jean-Cyprien Heam & Pavol Jurca & Sam Langfield & Sebastiano Laviola & Franka Liedorp & Antonio Sánchez & Santiago Tavolaro & Guillaume Vuillemey, 2013. "The structure and resilience of the European interbank market," ESRB Occasional Paper Series 03, European Systemic Risk Board.
    2. Umed Temursho, 2018. "Entropy‐based benchmarking methods," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 72(4), pages 421-446, November.
    3. Toni Ahnert, 2016. "Rollover Risk, Liquidity and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1753-1785, December.
    4. Aldasoro, Iñaki & Faia, Ester, 2016. "Systemic loops and liquidity regulation," Journal of Financial Stability, Elsevier, vol. 27(C), pages 1-16.
    5. Itamar Drechsler & Thomas Drechsel & David Marques-Ibanez & Philipp Schnabl, 2016. "Who Borrows from the Lender of Last Resort?," Journal of Finance, American Finance Association, vol. 71(5), pages 1933-1974, October.
    6. Umed Temurshoev & Ronald E. Miller & Maaike C. Bouwmeester, 2013. "A Note On The Gras Method," Economic Systems Research, Taylor & Francis Journals, vol. 25(3), pages 361-367, September.
    7. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 3-41, December.
    8. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    9. Iyer, Rajkamal & Peydró, José-Luis, 2011. "Interbank contagion at work: Evidence from a natural experiment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(4), pages 1337-1377.
    10. Zachary Feinstein & Weijie Pang & Birgit Rudloff & Eric Schaanning & Stephan Sturm & Mackenzie Wildman, 2017. "Sensitivity of the Eisenberg-Noe clearing vector to individual interbank liabilities," Papers 1708.01561, arXiv.org, revised Oct 2018.
    11. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    12. Péter Csóka & P. Jean-Jacques Herings, 2018. "Decentralized Clearing in Financial Networks," Management Science, INFORMS, vol. 64(10), pages 4681-4699, October.
    13. Hyun Song Shin, 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 101-119, Winter.
    14. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
    15. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    16. Jin Cao & Gerhard Illing, 2011. "Endogenous Exposure to Systemic Liquidity Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 173-216, June.
    17. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    18. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    19. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, vol. 17(1), pages 107-160.
    20. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    21. G. Günlük‐Şenesen & J. M. Bates, 1988. "Some Experiments with Methods of Adjusting Unbalanced Data Matrices," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 151(3), pages 473-490, May.
    22. Anand, Kartik & van Lelyveld, Iman & Banai, Ádám & Friedrich, Soeren & Garratt, Rodney & Hałaj, Grzegorz & Fique, Jose & Hansen, Ib & Jaramillo, Serafín Martínez & Lee, Hwayun & Molina-Borboa, José Lu, 2018. "The missing links: A global study on uncovering financial network structures from partial data," Journal of Financial Stability, Elsevier, vol. 35(C), pages 107-119.
    23. Hamed Amini & Rama Cont & Andreea Minca, 2016. "Resilience To Contagion In Financial Networks," Mathematical Finance, Wiley Blackwell, vol. 26(2), pages 329-365, April.
    24. Seung Hwan Lee, 2013. "Systemic Liquidity Shortages and Interbank Network Structures," Working Papers 2013-4, Economic Research Institute, Bank of Korea.
    25. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    26. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
    27. Iman van Lelyveld & Franka Liedorp, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    28. Kartik Anand & Ben Craig & Goetz von Peter, 2015. "Filling in the blanks: network structure and interbank contagion," Quantitative Finance, Taylor & Francis Journals, vol. 15(4), pages 625-636, April.
    29. Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
    30. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    31. Ratnovski, Lev, 2009. "Bank liquidity regulation and the lender of last resort," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 541-558, October.
    32. Stephen Morris & Hyun Song Shin, 2008. "Financial Regulation in a System Context," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 229-274.
    33. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    34. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    35. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
    36. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    37. L. C. G. Rogers & L. A. M. Veraart, 2013. "Failure and Rescue in an Interbank Network," Management Science, INFORMS, vol. 59(4), pages 882-898, April.
    38. Laurent Clerc & Alberto Giovannini & Sam Langfield & Tuomas Peltonen & Richard Portes & Martin Scheicher, 2016. "Indirect contagion: the policy problem," ESRB Occasional Paper Series 09, European Systemic Risk Board.
    39. Bank for International Settlements, 2010. "Macroprudential instruments and frameworks: a stocktaking of issues and experiences," CGFS Papers, Bank for International Settlements, number 38.
    40. Langfield, Sam & Liu, Zijun & Ota, Tomohiro, 2014. "Mapping the UK interbank system," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 288-303.
    41. Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
    42. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    43. repec:dgr:rugggd:gd-122 is not listed on IDEAS
    44. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    45. Lee, Seung Hwan, 2013. "Systemic liquidity shortages and interbank network structures," Journal of Financial Stability, Elsevier, vol. 9(1), pages 1-12.
    46. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    47. Hans Degryse & Grégory Nguyen, 2007. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 123-171, June.
    48. Christoph Memmel & Angelika Sachs & Ingrid Stein, 2012. "Contagion in the Interbank Market with Stochastic Loss Given Default," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 177-206, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Spyros Alogoskoufis & Sam Langfield, 2020. "Regulating the Doom Loop," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 251-292, September.
    2. Reale, Jessica, 2024. "Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach," Journal of Economic Dynamics and Control, Elsevier, vol. 160(C).
    3. Riccardo Doyle, 2020. "Using Network Interbank Contagion in Bank Default Prediction," Papers 2005.12619, arXiv.org, revised May 2020.
    4. Tathagata Banerjee & Alex Bernstein & Zachary Feinstein, 2018. "Dynamic Clearing and Contagion in Financial Networks," Papers 1801.02091, arXiv.org, revised Jun 2024.
    5. Giuseppe C. Calafiore & Giulia Fracastoro & Anton V. Proskurnikov, 2022. "Clearing Payments in Dynamic Financial Networks," Papers 2201.12898, arXiv.org, revised May 2022.
    6. Bardoscia, Marco & Ferrara, Gerardo & Vause, Nicholas & Yoganayagam, Michael, 2021. "Simulating liquidity stress in the derivatives market," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    7. Zachary Feinstein & Andreas Sojmark, 2019. "A Dynamic Default Contagion Model: From Eisenberg-Noe to the Mean Field," Papers 1912.08695, arXiv.org.
    8. Balluck, Kushal & Galiay, Artus & Ferrara, Gerardo & Hogarth, Glenn, 2016. "The small bank failures of the early 1990s: another story of boom and bust," Bank of England Quarterly Bulletin, Bank of England, vol. 56(1), pages 41-51.
    9. Hong Chen & Tan Wang & David D. Yao, 2021. "Financial Network and Systemic Risk—A Dynamic Model," Production and Operations Management, Production and Operations Management Society, vol. 30(8), pages 2441-2466, August.
    10. Zachary Feinstein, 2017. "Obligations with Physical Delivery in a Multi-Layered Financial Network," Papers 1702.07936, arXiv.org, revised May 2019.
    11. Chen, Xiaoxiong & Mu, Jinghao & Liu, Guanchun & Liu, Yuanyuan, 2024. "Bank liability structure and corporate employment: Evidence from a quasi-natural experiment in China," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    12. de Ramon, Sebastian & Francis, William & Milonas, Kristoffer, 2017. "An overview of the UK banking sector since the Basel Accord: insights from a new regulatory database," Bank of England working papers 652, Bank of England.
    13. Giuseppe Calafiore & Giulia Fracastoro & Anton V. Proskurnikov, 2022. "Control of Dynamic Financial Networks (The Extended Version)," Papers 2205.08879, arXiv.org.
    14. Zachary Feinstein & Andreas Sojmark, 2020. "Dynamic Default Contagion in Heterogeneous Interbank Systems," Papers 2010.15254, arXiv.org, revised Jul 2021.
    15. Bonner, Clemens & Wedow, Michael & Budnik, Katarzyna & Koban, Anne & Kok, Christoffer & Laliotis, Dimitrios & Meller, Barbara & Melo, Ana Sofia & Moldovan, Iulia & Schmitz, Stefan & Couaillier, Cyril , 2018. "Systemic liquidity concept, measurement and macroprudential instruments," Occasional Paper Series 214, European Central Bank.
    16. Paola D'Orazio & Jessica Reale & Anh Duy Pham, 2023. "Climate-induced liquidity crises: interbank exposures and macroprudential implications," Chemnitz Economic Papers 059, Department of Economics, Chemnitz University of Technology.
    17. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    2. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    3. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    4. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Markets," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.
    5. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    6. Bardoscia, Marco & Barucca, Paolo & Brinley Codd, Adam & Hill, John, 2017. "The decline of solvency contagion risk," Bank of England working papers 662, Bank of England.
    7. Bardoscia, Marco & Barucca, Paolo & Codd, Adam Brinley & Hill, John, 2019. "Forward-looking solvency contagion," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    8. Peralta, Gustavo & Crisóstomo, Ricardo, 2016. "Financial contagion with spillover effects: a multiplex network approach," ESRB Working Paper Series 32, European Systemic Risk Board.
    9. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    10. Siklos, Pierre L. & Stefan, Martin, 2021. "Exchange rate shocks in multicurrency interbank markets," Journal of Financial Stability, Elsevier, vol. 55(C).
    11. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    12. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    13. Aikman, David & Beale, Daniel & Brinley-Codd, Adam & Covi, Giovanni & Hüser, Anne‑Caroline & Lepore, Caterina, 2023. "Macroprudential stress‑test models: a survey," Bank of England working papers 1037, Bank of England.
    14. Georgescu, Oana-Maria, 2015. "Contagion in the interbank market: Funding versus regulatory constraints," Journal of Financial Stability, Elsevier, vol. 18(C), pages 1-18.
    15. Cappelletti, Giuseppe & Mistrulli, Paolo Emilio, 2023. "The role of credit lines and multiple lending in financial contagion and systemic events," Journal of Financial Stability, Elsevier, vol. 67(C).
    16. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    17. repec:zbw:bofrdp:2013_019 is not listed on IDEAS
    18. Valentina Macchiati & Giuseppe Brandi & Tiziana Di Matteo & Daniela Paolotti & Guido Caldarelli & Giulio Cimini, 2022. "Systemic liquidity contagion in the European interbank market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(2), pages 443-474, April.
    19. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    20. Nan Chen & Xin Liu & David D. Yao, 2016. "An Optimization View of Financial Systemic Risk Modeling: Network Effect and Market Liquidity Effect," Operations Research, INFORMS, vol. 64(5), pages 1089-1108, October.
    21. Batiz-Zuk, Enrique & López-Gallo, Fabrizio & Martínez-Jaramillo, Serafín & Solórzano-Margain, Juan Pablo, 2016. "Calibrating limits for large interbank exposures from a system-wide perspective," Journal of Financial Stability, Elsevier, vol. 27(C), pages 198-216.

    More about this item

    Keywords

    Interbank network; systemic risk; liquidity regulation; macroprudential policy;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0586. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Media Team (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.