Liquidity risk contagion in the interbank market

Eross, Andrea; Urquhart, Andrew; Wolfe, Simon

doi:10.1016/j.intfin.2016.07.005

Cited by 19 publications

(9 citation statements)

References 52 publications

(49 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Diamond and Rajan (2011) show that banks might become illiquidity seekers to avoid realized losses due to asset fire sales and in anticipation of asset price recoveries. Eross et al (2016) find evidence of endogenous responses and spillovers within the interbank market. Lopez-Espinosa et al…”

Section: Related Literaturementioning

confidence: 83%

Margin requirements and systemic liquidity risk

Bakoush

Gerding

Wolfe

2019

Journal of International Financial Markets, Institutions and Mo

Self Cite

View full text Add to dashboard Cite

We develop a model in which margin procyclicality and the propensity for liquidity hoarding interact to generate a systemic liquidity crisis. In this model, banks lend and borrow in the interbank market to mitigate liquidity risk and trade derivatives contracts in the OTC derivatives market to mitigate market risk. The daily mark-to-market of derivatives contracts results in daily margin calls that banks cover using high quality liquid assets. We find that distress due to margin procyclicality in the derivatives market can spillover to the interbank market leading to systemic liquidity risk. Interconnectedness further amplifies the effects of systemic risk within the interbank market. The model shows that central clearing might increase the possibility of systemic liquidity risk due to tight margin requirements and the timing of cash flows required from banks. We also find that haircut levels affect the possibility of systemic liquidity risk, and highlight the potential role of a market maker of last resort in limiting this possibility.

show abstract

Section: Related Literaturementioning

confidence: 83%

Margin requirements and systemic liquidity risk

Bakoush

Gerding

Wolfe

2019

Journal of International Financial Markets, Institutions and Mo

Self Cite

View full text Add to dashboard Cite

show abstract

“…When faced with underlying risks, banks have a serious sense of panic, which will be transmitted to the major institution of neighboring banks through the credit association network under the influence of the irrational behavior of the bank. en, the neighboring bank conveys a sense of panic to the neighboring bank, finally showing a remarkable "herd mentality" [12,58,59].…”

Section: Credit Risk Contagion Probability Of Bank Networkmentioning

confidence: 99%

Double-Layer Network Model of Bank-Enterprise Counterparty Credit Risk Contagion

et al. 2020

View full text Add to dashboard Cite

Banks and enterprises constitute a multilayered, multiattribute, multicriteria credit-related super network due to financial transaction behaviors, such as credit, wealth management, savings, and derivatives. Such a network has become an important channel for credit risk cross-contagion. This study constructs a two-layer network model of credit risk contagion between the bank and corporate counterparties from the perspective that banks do not withdraw loans from enterprises by considering the influence of corporate credit defaults on their counterparties under the credit linkage. This study analyzes the mechanism of influencing the evolution of bank-enterprise counterparty credit risk contagion in the two-tier network through theoretical analysis, including the following: the enterprises’ coping ability, risk preference, influence, level of interenterprise credit risk contagion and its network heterogeneity in the interenterprise credit association network, the risk prevention and control ability, business correlation degree, interbank credit risk contagion and its network heterogeneity in the interbank credit association network, the level of credit risk contagion between bank-enterprise counterparty credit association networks, and other factors in the case that banks do not withdraw loans from enterprises. In addition, this study performs a calculation experiment to analyze the characteristics of the evolution of counterparty credit risk contagion of bank and corporate counterparties under the double-layer network. The following four major conclusions can be drawn from the results. First, in the interenterprise credit-related network, the threshold of credit risk contagion rate is positively correlated with the marginal increase in risk perception and risk leveling ability of the enterprise. By contrast, such threshold is negatively correlated with the marginal decrease in the initial economic impact, leverage level, and influence of the enterprise. Moreover, the scale of corporate counterparty credit risk contagion is negatively correlated with the enterprise’s risk perception level and risk spillover ability but positively correlated with the enterprise’s initial economic shock level, the enterprise’s leverage level, and influence. Second, in the interbank credit association network, the threshold of the rate of credit risk contagion is negatively correlated with the marginal decrease in the degree of interbank business association but positively correlated with the marginal increase in the bank’s risk resistance ability and risk information processing ability. Furthermore, the scale of credit risk contagion of bank counterparties is positively correlated with the degree of interbank business association but negatively correlated with the bank’s ability to resist risks and process risk information. Third, if the heterogeneity of the credit-related network of bank-enterprise counterparties is high, then the rate threshold of credit risk contagion is high and the scale of credit risk diffusion is low. Moreover, the scale of credit risk contagion of bank counterparties is positively correlated with the marginal decrease in the degree of corporate and bank counterparties. Finally, the scale of bank counterparty credit risk contagion is a monotonically increasing convex function of the credit risk contagion rate in the enterprise credit association network and among the bank-enterprise networks.

show abstract

“…The conclusion derived when they assessed how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank's ability to meet liquidity demand using quarterly data of bilateral interbank credit exposure among all Germany banks from 2000 to 2008 to measure interbank relationships and network characteristics. Eross et al (2016) study liquidity risk contagion within the interbank market by assessing the long-run relationship of short-term interest rate spreads from January 2002 to December 2015. They found that when the short-term interbank market is affected by a liquidity shock, the London Interbank Offered Rate-overnight index swap spread is a leader in moving back to equilibrium, while the euro-dollar currency swap rate and the USA-German bond spreads are followers.…”

Section: Literature Reviewmentioning

confidence: 99%

Exposure to interbank investment and financing risk by Islamic banks: a dynamic panel analysis of Malaysia

Mohamad

Sulaiman

Achour

2020

IMEFM

View full text Add to dashboard Cite

Purpose The Government of Malaysia has developed an Islamic Interbank Money Market since January 1994 with the objective to facilitate funding for the Islamic banking sector in the country. This platform also enables Islamic banks to obtain Sharīʿah-compliant funds from other Islamic banks. This study aims to examine the effects of interbank investment and financing risk on the financing decisions of Malaysia’s Islamic banks between 1994 and 2015. The financing decisions are used as financing measures to determine the effect of investing in the interbank market and financing risk indicators on financing. Design/methodology/approach The descriptive, correlation and dynamic panel analysis results are derived with the help of LIMDEP 9.0 software. Findings The study found a negative relationship between the interbank investment variable with the financing decisions of Islamic banks. This reflects that an increase in interbank investment leads Islamic banks to reduce their level of financing. These findings prove that the investment activities between Islamic banks had a “substitution effect” and decreased their capability of financing because of their tendency to maintain liquidity. Originality/value Islamic banks are confident that they will generate higher profits in the coming financial year. The economic conditions of Malaysia do not influence Islamic banks’ financing decisions, whereas Islamic banks in this study are more dependent on the balance sheet indicators.

show abstract

Liquidity risk contagion in the interbank market

Cited by 19 publications

References 52 publications

Margin requirements and systemic liquidity risk

Margin requirements and systemic liquidity risk

Double-Layer Network Model of Bank-Enterprise Counterparty Credit Risk Contagion

Exposure to interbank investment and financing risk by Islamic banks: a dynamic panel analysis of Malaysia

Contact Info

Product

Resources

About