Systemic Illiquidity in the Interbank Network
47 Pages Posted: 5 Nov 2020
Date Written: November, 2018
We study systemic illiquidity using a unique dataset on 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, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network.
Keywords: liquidity regulation, macroprudential policy, systemic risk
JEL Classification: D85, E44, E58, G28
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