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Liquidity contagion with a “first-in/first-out†seniority of claims

Author

Listed:
  • Edoardo Gaffeo

    (University of Trento)

  • Lucio Gobbi

    (University of Trento)

  • Massimo Molinari

    (Market Operations Directorate, Bank of Italy)

Abstract

Building upon Lee (2013), this paper puts forward a methodological issue and presents a simple numerical example showing that the extent of systemic liquidity shortages due to a contagious funding run is strictly dependent on the seniority assigned to the different categories of claimants wishing to withdraw funds from financial intermediaries. In more detail, we find that a clearing payment algorithm based on the priority of interbank debt over depositors is found to potentially underestimate such liquidity shortages, if compared to a seniority rule working the other way round. This aspect may be of interest for supervisors implementing macro-prudential stress-testing exercises.

Suggested Citation

  • Edoardo Gaffeo & Lucio Gobbi & Massimo Molinari, 2019. "Liquidity contagion with a “first-in/first-out†seniority of claims," Economics Bulletin, AccessEcon, vol. 39(4), pages 2572-2579.
    • Handle: RePEc:ebl:ecbull:eb-18-00991
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Gaffeo Edoardo & Gobbi Lucio, 2021. "Achieving financial stability during a liquidity crisis: a multi-objective approach," Risk Management, Palgrave Macmillan, vol. 23(1), pages 48-74, June.

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    More about this item

    Keywords

    Financial contagion; Seniority of payments; Liquidity shortages;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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