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The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

  • The paper presents a comprehensive model of a banking system that integrates network effects, bankruptcy costs, fire sales, and cross-holdings. For the integrated financial market we prove the existence of a price-payment equilibrium and design an algorithm for the computation of the greatest and the least equilibrium. The number of defaults corresponding to the greatest price-payment equilibrium is analyzed in several comparative case studies. These illustrate the individual and joint impact of interbank liabilities, bankruptcy costs, fire sales and cross-holdings on systemic risk. We study policy implications and regulatory instruments, including central bank guarantees and quantitative easing, the significance of last wills of financial institutions, and capital requirements.

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Author:Stefan Weber, Kerstin WeskeORCiD
DOI original:https://doi.org/10.1186/s41546-017-0020-9
Parent Title (English):Probability, Uncertainty and Quantitative Risk
Document Type:Article
Year of Completion:2017
Publishing Institution:Hochschule Hannover
Release Date:2023/11/20
Tag:Bankruptcy costs; Cross-holdings; Financial contagion; Financial network; Fire sales; Systemic risk
Article Number:9
Page Number:38
Link to catalogue:1871786185
Institutes:Fakult├Ąt IV - Wirtschaft und Informatik
DDC classes:330 Wirtschaft
Licence (German):License LogoCreative Commons - CC BY - Namensnennung 4.0 International