Complexity, concentration and contagion |
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Authors: | Prasanna Gai Andrew Haldane Sujit Kapadia |
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Institution: | aDepartment of Economics, University of Auckland, 12 Grafton Road, Auckland 1142, New Zealand;bBank of England, Threadneedle Street, London EC2R 8AH, United Kingdom |
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Abstract: | This paper develops a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage. We show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007–2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages. Our model illustrates how greater complexity and concentration in the financial network may amplify this fragility. The analysis suggests how a range of policy measures – including tougher liquidity regulation, macro-prudential policy, and surcharges for systemically important financial institutions – could make the financial system more resilient. |
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