Physics – Condensed Matter – Disordered Systems and Neural Networks
Scientific paper
2001-04-04
Physics
Condensed Matter
Disordered Systems and Neural Networks
presented at the conference Application of Physics in Economic Modelling, February 8 - 10, 2001, Prague
Scientific paper
10.1016/S0378-4371(01)00297-7
An interbank market lets participants pool the risk arising from the combination of illiquid investments and random withdrawals by depositors. But it also creates the potential for one bank's failure to trigger off avalanches of further failures. We simulate a model of interbank lending to study the interplay of these two effects. We show that when banks are similar in size and exposure to risk, avalanche effects are small so that widening the interbank market leads to more stability. But as heterogeneity increases, avalanche effects become more important. By varying the heterogeneity and connectivity across banks, the system enters a critical regime with a power law distribution of avalanche sizes.
Iori Giulia
Jafarey Saqib
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