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The Link Between Incomplete Information on the Interbank Network and Counterparty Risk

  1. Journals
  2. Economics, Finance, Business & Management
  3. Credit and Capital Markets – Kredit und Kapital
  4. Vol. 52, Issue 2
  5. pp. 213–227

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Förster, D., Walther, M. The Link Between Incomplete Information on the Interbank Network and Counterparty Risk. Credit and Capital Markets – Kredit und Kapital, 52(2), 213-227. https://doi.org/10.3790/ccm.52.2.213
Förster, Daniel and Walther, Martin "The Link Between Incomplete Information on the Interbank Network and Counterparty Risk" Credit and Capital Markets – Kredit und Kapital 52.2, 2019, 213-227. https://doi.org/10.3790/ccm.52.2.213
Förster, Daniel/Walther, Martin (2019): The Link Between Incomplete Information on the Interbank Network and Counterparty Risk, in: Credit and Capital Markets – Kredit und Kapital, vol. 52, iss. 2, 213-227, [online] https://doi.org/10.3790/ccm.52.2.213
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The Link Between Incomplete Information on the Interbank Network and Counterparty Risk

Förster, Daniel | Walther, Martin

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 2 : pp. 213–227

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.52.2.213
Language
English
Pages
15
Keywords

Author Details

Dr. Daniel Förster: Technische Universität Berlin, Chair of Finance and Investment, Sec. H 64, Straße des 17. Juni 135, 10623 Berlin,telephone: +49 30 314 28904, fax: +49 30 314 21125

Dr. Martin Walther (corresponding author): Technische Universität Berlin, Chair of Finance and Investment, Sec. H 64, Straße des 17. Juni  135, 10623 Berlin, Germany, telephone: +49 30 314 28904, fax:  +49 30 314 21125

References

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  26. Acharya, V. V./Yorulmazer, T. (2008): Information contagion and bank herding. Journal of Money, Credit and Banking, Vol. 40(1), pp. 215–231.  Google Scholar
  27. Adrian, T./Estrella, A. (2010): Financial intermediaries and monetary economics. Handbook of Monetary Economics, Vol. 3, Elsevier, pp. 601–650.  Google Scholar
  28. Adrian, T./Shin, H. S. (2008): Financial intermediary leverage and value-at-risk. Staff report no. 228, Federal Reserve Bank of New York.  Google Scholar
  29. Allen, F./Babus, A./Carletti, E. (2012): Asset commonality, debt maturity and systemic risk. Journal of Financial Economics, Vol. 104(3), pp. 519–534.  Google Scholar
  30. Allen, F./Gale, D. (2000): Financial Contagion. Journal of Political Economy, Vol. 108 (1), pp. 1–33.  Google Scholar
  31. Blanchard, O. (2009): The crisis: basic mechanisms and appropriate policies. International Monetary Fund.  Google Scholar
  32. Boss, M./Elsinger, H./Summer, M./Thurner, S. (2004): Network topology of the interbank market. Quantitative Finance, Vol. 4(6), pp. 677–684.  Google Scholar
  33. Brusco, S./Castiglionesi, F. (2007): Liquidity coinsurance, moral hazard, and financial contagion. The Journal of Finance, Vol. 62(5), pp. 2275–2302.  Google Scholar
  34. Caballero, R. J./Simsek, A. (2013): Fire Sales in a Model of Complexity. The Journal of Finance, Vol. 68 (6), pp. 2549–2587.  Google Scholar
  35. Cocco, J. F./Gomes, F. J./Martins, N. C. (2009): Lending relationships in the interbank market. Journal of Financial Intermediation, Vol. 18(1), pp. 24–48.  Google Scholar
  36. Dasgupta, A. (2004): Financial contagion through capital connections: A model of the origin and spread of bank panics. Journal of the European Economic Association, Vol. 2(6), pp. 1049–1084.  Google Scholar
  37. Diamond, D. W./Dybvig, P. H. (1983): Bank runs, deposit insurance, and liquidity. Journal of Political Economy, Vol. 91(3), pp. 401–419.  Google Scholar
  38. Diamond, D. W./Rajan, R. G. (2011): Fear of fire sales, illiquidity seeking, and credit freezes. The Quarterly Journal of Economics, Vol. 126 (2), pp. 557–591.  Google Scholar
  39. Förster, D. (2016): Schockverstärkung durch Insolvenzkaskaden in Bankensystemen. Berlin, Callsen-Bracker Verlag.  Google Scholar
  40. Freixas, X./Parigi, B. M./Rochet, J. C. (2000): Systemic risk, interbank relations, and liquidity provision by the central bank. Journal of Money, Credit and Banking, Vol. 32, pp. 611–638.  Google Scholar
  41. Furfine, C. (2003): Interbank exposures: Quantifying the risk of contagion. Journal of Money, Credit, and Banking, Vol. 35(1), pp. 111–128.  Google Scholar
  42. Gale, D./Yorulmazer, T. (2013): Liquidity hoarding. Theoretical Economics, Vol. 8 (2), pp. 291–324.  Google Scholar
  43. Kiyotaki, N./Moore, J. (1997): Credit cycles. Journal of Political Economy, Vol. 105(2), pp. 211–248.  Google Scholar
  44. Liu, Z./Quiet, S./Roth, B. (2015): Banking sector interconnectedness: what is it, how can we measure it and why does it matter? Working paper.  Google Scholar
  45. Morris, S./Shin, H. S. (2004): Liquidity black holes. Review of Finance, Vol. 8(1), 1–18.  Google Scholar
  46. Shleifer, A./Vishny, R. W. (1992): Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, Vol. 47(4), pp. 1343–1366.  Google Scholar
  47. Upper, C./Worms, A. (2004): Estimating bilateral exposures in the German interbank market: Is there a danger of contagion? European Economic Review, Vol. 48(4), pp. 827–849.  Google Scholar
  48. Wagner, W. (2010): Diversification at financial institutions and systemic crises. Journal of Financial Intermediation, Vol. 19(3), pp. 373–386.  Google Scholar

Abstract

This paper describes a model in which a network of interbank loans leads to a severe amplification of the previously unanticipated insolvency of one bank. Banks that cannot rule out an indirect hit react by selling assets and hoarding liquidity. While this potentially lowers illiquidity risks, it depresses market liquidity and prices. This leads to a negative externality by which sales to acquire liquidity simultaneously lead to lower global sale proceeds and thus to a greater number of insolvencies inducing deadweight losses. Thus, the distribution of information on the network has a direct impact on welfare by itself.

Table of Contents

Section Title Page Action Price
Daniel Förster / Martin Walther: The Link Between Incomplete Information on the Interbank Network and Counterparty Risk 1
Abstract 1
Zusammenfassung: Der Zusammenhang zwischen unvollständigen Informationen über das Banknetzwerk und Adressenausfallrisiken 1
I. Introduction 2
II. Model 5
III. Market Equilibrium 7
IV. Results 1
References 1

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