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The Link Between Incomplete Information on the Interbank Network and Counterparty Risk

The Link Between Incomplete Information on the Interbank Network and Counterparty Risk
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Year:    2019

Author:    Förster, Daniel, Walther, Martin

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 2 : pp. 213–227

Abstract

This paper describes a model in which a network of interbank loans leads to a severe amplification of the previously unanticipated insolvency of one bank. Banks that cannot rule out an indirect hit react by selling assets and hoarding liquidity. While this potentially lowers illiquidity risks, it depresses market liquidity and prices. This leads to a negative externality by which sales to acquire liquidity simultaneously lead to lower global sale proceeds and thus to a greater number of insolvencies inducing deadweight losses. Thus, the distribution of information on the network has a direct impact on welfare by itself.

Journal Article Details

Publisher Name:    Global Science Press

Language:    English

DOI:    https://doi.org/10.3790/ccm.52.2.213

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 2 : pp. 213–227

Published online:    2019-04

AMS Subject Headings:    Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    15

Keywords:    Banks Cash-in-the-Market Pricing Counterparty risk Incomplete information Liquidity G01 G11 G21 G33

Author Details

Förster, Daniel

Walther, Martin

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  34. Caballero, R. J./Simsek, A. (2013): Fire Sales in a Model of Complexity. The Journal of Finance, Vol. 68 (6), pp. 2549–2587.  Google Scholar
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  40. Freixas, X./Parigi, B. M./Rochet, J. C. (2000): Systemic risk, interbank relations, and liquidity provision by the central bank. Journal of Money, Credit and Banking, Vol. 32, pp. 611–638.  Google Scholar
  41. Furfine, C. (2003): Interbank exposures: Quantifying the risk of contagion. Journal of Money, Credit, and Banking, Vol. 35(1), pp. 111–128.  Google Scholar
  42. Gale, D./Yorulmazer, T. (2013): Liquidity hoarding. Theoretical Economics, Vol. 8 (2), pp. 291–324.  Google Scholar
  43. Kiyotaki, N./Moore, J. (1997): Credit cycles. Journal of Political Economy, Vol. 105(2), pp. 211–248.  Google Scholar
  44. Liu, Z./Quiet, S./Roth, B. (2015): Banking sector interconnectedness: what is it, how can we measure it and why does it matter? Working paper.  Google Scholar
  45. Morris, S./Shin, H. S. (2004): Liquidity black holes. Review of Finance, Vol. 8(1), 1–18.  Google Scholar
  46. Shleifer, A./Vishny, R. W. (1992): Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, Vol. 47(4), pp. 1343–1366.  Google Scholar
  47. Upper, C./Worms, A. (2004): Estimating bilateral exposures in the German interbank market: Is there a danger of contagion? European Economic Review, Vol. 48(4), pp. 827–849.  Google Scholar
  48. Wagner, W. (2010): Diversification at financial institutions and systemic crises. Journal of Financial Intermediation, Vol. 19(3), pp. 373–386.  Google Scholar

Section Title Page Action Price
Daniel Förster / Martin Walther: The Link Between Incomplete Information on the Interbank Network and Counterparty Risk 1
Abstract 1
Zusammenfassung: Der Zusammenhang zwischen unvollständigen Informationen über das Banknetzwerk und Adressenausfallrisiken 1
I. Introduction 2
II. Model 5
III. Market Equilibrium 7
IV. Results 1
References 1