Default risk in an interconnected banking system with endogeneous asset markets

This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depe
This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies. JEL Classification: G01, G18, G33 Keywords: Systemic Risk, Systemic Risk Charge, Systemic Risk Fund, Macroprudential Supervision, Shapley Value, Financial Network
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Metadaten
Author:Marcel Bluhm, Jan Pieter Krahnen
URN:urn:nbn:de:hebis:30-115350
Series (Serial Number):CFS working paper series (2011, 19)
Document Type:Working Paper
Language:English
Date of Publication (online):2011/09/14
Year of first Publication:2011
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2011/09/14
Tag:macroprudential supervision; systemic risk; systemic risk charge ; systemic risk fund
HeBIS PPN:277078679
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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