Funding Liquidity Risk in a Quantitative Model of Systemic Stability
39 Pages Posted: 17 Jun 2009
Date Written: June 15, 2009
We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is known as RAMSI and is still in its development phase. It is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profiles and confidence may trigger the outright closure of funding markets to particular institutions. In presenting results, we focus on aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side feedbacks, leading to system-wide instability.
Keywords: systemic risk, financial stability models, funding liquidity risk, contagion
JEL Classification: G01, G21, G32
Suggested Citation: Suggested Citation