Contagion Risks and Systemic Stability in Financial Networks

Jingqian Tian,Xiaoxing Liu,Longmiao Qiu,Chao Wang,Anna M Gil-Lafuente

doi:10.1155/2021/6123989

Jingqian Tian, Xiaoxing Liu + Show 3 more

Open Access

https://doi.org/10.1155/2021/6123989

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Abstract

An agent-based model is proposed, constructing an evolutionary banking system, where interbank loans and investment strategies are, respectively, determined by liquidity shortage and utility maximization. The causes of systemic risk are then explored based on the evolutionary banking system, which is calibrated by a sample from China. The regulatory interventions indicate the positive effects of increased investment assets, while the negative but inappreciable effects of increased interbank counterparties on contagion risks decrease. This observation hints at the possibility of promoting systemic stability by incentivizing more diversifications in investment assets instead of interbank counterparties. The results also demonstrate the advantages of prudential liquidity requirements, interbank liquidity facilities, and monetary policies from the central bank in promoting banking system stability.

Highlights

After several recent troubled years for the global economy, in which the high integration of financial systems worldwide has been highlighted, systemic risk is the main focus of a growing number of investigations among both practitioners and scholars [1]
It is worth noting that the correlation between D′ and devaluation risk decreases a great deal when compared to the liquidity risk and the market risk. ough many results have highlighted the spiral effect of common assets and interbank loans on fire sales, our results indicate that interbank loans provide an inappreciable promotion for contagions in the cascade of fire sales when compared to common assets. is conclusion will be further validated in the following discussion
An agent-based model is proposed and calibrated to explore the effect of interbank loans and common assets on systemic risk. e results show that the systemic risk consists of the market risk, liquidity risk, and devaluation risk, which are determined by investment losses, liquidity shortages, and fire sales, respectively

Summary

Introduction

After several recent troubled years for the global economy, in which the high integration of financial systems worldwide has been highlighted, systemic risk is the main focus of a growing number of investigations among both practitioners and scholars [1]. Most studies show that contagion risks among banks are divided into two main channels: interbank loans and common assets. There have been many studies on contagion risks related to interbank loans, some studies in recent years showed that contagion risks are largely determined by the common assets of banks [24,25,26]. Erefore, referring to Aldasoro et al [37] on endogenous risk, we construct a banking system based on dynamic endogenous mechanisms to analyze the systemic risk caused by interbank loans and common assets, where factors related to individual properties are considered. Despite interbank loans and common assets having been widely discussed as systemic risk causes, we refer to their dynamic effects on contagion risks in an endogenous banking system.

Agent-Based Model

Parameterization and Validation

Empirical Results

Regulatory Interventions

Disclosure

Conclusion