Citation

Discussion Paper Details

Please find the details for DP2325 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank

Author(s): Xavier Freixas, Bruno Parigi and Jean-Charles Rochet

Publication Date: December 1999

Keyword(s): Coordination, Interbank Market, Liquidity and Payment System

Programme Area(s): Financial Economics

Abstract: We model systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow banks to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure (gridlock equilibrium) even if all banks are solvent. When one bank is insolvent, the stability of the banking system is affected in various ways depending on the patterns of payments across locations. We investigate the ability of the banking industry to withstand the insolvency of one bank and whether the closure of one bank generates a chain reaction on the rest of the system. We analyze the coordinating role of the Central Bank in preventing payments' systemic repercussions and we examine the justification of the 'too-big-to-fail-policy'.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2325

Bibliographic Reference

Freixas, X, Parigi, B and Rochet, J. 1999. 'Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2325