An adaptive endogenous network model for dynamic interbank lending market with central bank

Abstract

In this paper, an adaptive endogenous model is introduced to explain the formation and evolution mechanism of interbank lending market with central bank. We investigate the evolution of structure of interbank lending market and the impact of structure of bank assets, bank adaptive behaviors, liquidity and dispersion on the resilience of interbank lending market, respectively. Simulation results demonstrate that the structure of the initial interbank lending market has scale-free and small-world features, which keeps in the evolution of the network. Moreover, we find risk gathering requires relatively long time but the outbreak is concentrated and percentage of defaults is a nonmonotonic function of percentage of initial liquid assets. Furthermore, we discover that moderate liquidity hoarding helps to reduce risk contagion effect in the initial stage of contagion while excessive hoarding of liquidity increases the fragility of the network.