The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

Stefan Weber; Kerstin Weske

doi:10.1186/s41546-017-0020-9

Article Contents

2017, Volume 2: 9. Doi: 10.1186/s41546-017-0020-9

This volume Previous Article On the compensator of the default process in an information-based model Next Article Measure distorted arrival rate risks and their rewards

The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

Stefan Weber^, and
Kerstin Weske

Institut für Mathematische Stochastik, Leibniz Universität Hannover, Welfengarten 1, 30167 Hannover, Germany

Stefan Weber, sweber@stochastik.uni-hannover.de

Received: January 14, 2017

Revised: May 29, 2017

Published: September 2020

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Abstract

The paper presents a comprehensive model of a banking system that integrates network effects, bankruptcy costs, fire sales, and cross-holdings. For the integrated financial market we prove the existence of a price-payment equilibrium and design an algorithm for the computation of the greatest and the least equilibrium. The number of defaults corresponding to the greatest price-payment equilibrium is analyzed in several comparative case studies. These illustrate the individual and joint impact of interbank liabilities, bankruptcy costs, fire sales and cross-holdings on systemic risk. We study policy implications and regulatory instruments, including central bank guarantees and quantitative easing, the significance of last wills of financial institutions, and capital requirements.

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Mathematics Subject Classification: G01;G21;D85.

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