Dynamic Contagion of Systemic Risk in an Endogenous Banking System

Abstract

An endogenous banking system is proposed based on dynamic mechanisms of interbank loans and investment strategies to explore the behavioral incentives of diversification and its effects on systemic risk. The results highlight the advantages of different diversification strategies for different environments in preventing contagions of systemic risk. The evidence from the interbank market shows that big banks are more crucial for systemic risk prevention, and the intermediate scale of big banks is optimal for a stable banking system. As for the investment market, evidence shows that regulatory intervention should pay attention to the appropriate risk attitude for individual banks to promote systemic stability. These results provide a perspective of behavioral supervision for preventing contagions of systemic risk and indicate some reference for promoting the systemic stability of the banking system.