Control of Interbank Contagion Under Partial Information

Control of Interbank Contagion Under Partial Information

Optimal Control of Interbank Contagion under Complete Information

We study a preferred equity infusion government program set to mitigate interbank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to the risk of bank runs. The government seeks to maximize, under budget constraints, the total net worth of the financial system or, equivalently, to minimize the dead-weight losses induced by bank r...

Assessing interbank contagion using simulated networks

This paper presents a new approach to randomly generate interbank networks while overcoming shortcomings in the availability of bank-by-bank bilateral exposures. Our model can be used to simulate and assess interbank contagion effects on banking sector soundness and resilience. We find a strongly non-linear pattern across the distribution of simulated networks, whereby only for a small percenta...

An economic model of contagion in interbank lending markets

This paper examines the relationship between the structure of the interbank lending market and systemic risk. We consider a model in which banks finance investment opportunities through household deposits and borrowing from other banks. Using simulation techniques a range of interbank markets structures are considered. It is shown that greater levels of interbank connectivity reduce the risk of...

Contagion at the interbank market with stochastic LGD

This paper investigates contagion at the German interbank market under the assumption of a stochastic loss given default (LGD). We combine a unique data set about the LGD of interbank loans with data about interbank exposures. We find that the frequency distribution of the LGD is u-shaped. Under the assumption of a stochastic LGD, simulation results show a more fragile banking system than under...