Systemic Illiquidity in the Interbank Network

41 Pages Posted: 12 Apr 2016 Last revised: 15 Aug 2017

See all articles by Gerardo Ferrara

Gerardo Ferrara

Bank of England

Sam Langfield

European Central Bank

Zijun Liu

Bank of England

Tomohiro Ota

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: August 12, 2017

Abstract

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

Suggested Citation

Ferrara, Gerardo and Langfield, Sam and Liu, Zijun and Ota, Tomohiro, Systemic Illiquidity in the Interbank Network (August 12, 2017). Staff Working Paper No. 586, Available at SSRN: https://ssrn.com/abstract=2762375 or http://dx.doi.org/10.2139/ssrn.2762375

Gerardo Ferrara (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Zijun Liu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tomohiro Ota

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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