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Only Paul Could Go To Changchun

Bankruptcy Cascades in Interbank Markets

4/19/2018

 
Here.

Not an experimental paper.

We study a credit network and, in particular, an interbank system with an agent-based model. To understand the relationship between business cycles and cascades of bankruptcies, we model a three-sector economy with goods, credit and interbank market. In the interbank market, the participating banks share the risk of bad debits, which may potentially spread a bank’s liquidity problems through the network of banks. Our agent-based model sheds light on the correlation between bankruptcy cascades and the endogenous economic cycle of booms and recessions. It also demonstrates the serious trade-off between, on the one hand, reducing risks of individual banks by sharing them and, on the other hand, creating systemic risks through credit-related interlinkages of banks. As a result of our study, the dynamics underlying the meltdown of financial markets in 2008 becomes much better understandable.


From:

Gabriele Tedeschi
Universitá Politecnica delle Marche, Ancona, Italy

Amin Mazloumian
ETH Zurich, Zurich, Switzerland

Mauro Gallegati
Universitá Politecnica delle Marche, Ancona, Italy

Dirk Helbing
 ETH Zurich, Zurich, Switzerland



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