Systemic illiquidity in the interbank network

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 April 2016

Working Paper No. 586
By Gerardo Ferrara, Sam Langfield, Zijun Liu and Tomohiro Ota 

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.

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