Systemic Illiquidity in the Interbank Network
41 Pages Posted: 12 Apr 2016 Last revised: 15 Aug 2017
Date Written: August 12, 2017
We study systemic illiquidity using a unique data set on UK banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, we show that systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network.
Keywords: Interbank network, systemic risk, liquidity regulation, macroprudential policy
JEL Classification: D85, E44, E58, G28, L14
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