Abstract :
This paperdevelopsanetworkmodelofinterbanklendinginwhichunsecuredclaims,
repo activityandshockstothehaircutsappliedtocollateralassumecentrestage.We
show howsystemicliquiditycrisesofthekindassociatedwiththeinterbankmarket
collapse of2007–2008canarisewithinsuchaframework,withfundingcontagion
spreadingwidelythroughthewebofinterlinkages.Ourmodelillustrateshowgreater
complexityandconcentrationinthefinancialnetworkmayamplifythisfragility.The
analysissuggestshowarangeofpolicymeasures–includingtougherliquidityregulation,
macro-prudentialpolicy,andsurchargesforsystemicallyimportantfinancialinstitutions–
could makethefinancialsystemmoreresilient.
