Equilibrium interbank lending networks

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Abstract

We propose a model to study short-term interbank
lending from a network formation perspective. Banks, being
provided with public and private signals about the solvency of
other banks, decide on interbank lending by also considering the
decision of other banks to lend. We observe that the dominant
equilibrium networks are those where banks follow each others'
decisions, making the equilibria very vulnerable to shifts in
expectations. The networks range from fully connected (highly
liquid markets) to empty networks (frozen markets) and we
derive the conditions under which they emerge.
Original languageEnglish
Title of host publication2016 IEEE Congress on Evolutionary Computation (CEC)
Pages4543-4550
Number of pages8
Publication statusPublished - 2016

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Xiao, D., & Krause, A. (2016). Equilibrium interbank lending networks. In 2016 IEEE Congress on Evolutionary Computation (CEC) (pp. 4543-4550)