Systemic risk, interbank relations, and liquidity provision by the Central bank / Comment

This paper models systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow consumers to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market ex...

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Published in:Journal of money, credit and banking credit and banking, 2000-08, Vol.32 (3), p.611
Main Authors: Freixas, Xavier, Parigi, Bruno M, Jean-Charles Rochet, Krishnamurthy, Arvind
Format: Article
Language:English
Subjects:
Bank liquidity
Banking industry
Central banks
Credit
Insolvency
Lines of credit
Risk management
Studies
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creator Freixas, Xavier
Parigi, Bruno M
Jean-Charles Rochet
Krishnamurthy, Arvind
description This paper models systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow consumers to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure even if all banks are solvent. This paper investigates the ability of the banking system to withstand the insolvency of one bank and whether the closure of one bank generates a chain reaction on the rest of the system. It analyzes the coordinating role of the central bank in preventing payments systemic repercussions and examines the justification of the too-big-to-fail policy.
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language eng
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source International Bibliography of the Social Sciences (IBSS); ABI/INFORM Global (ProQuest); JSTOR Archival Journals and Primary Sources Collection
subjects Bank liquidity
Banking industry
Central banks
Credit
Insolvency
Lines of credit
Risk management
Studies
title Systemic risk, interbank relations, and liquidity provision by the Central bank / Comment
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