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Contagion Risks and Systemic Stability in Financial Networks

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  • Jingqian Tian
  • Chao Wang
  • Xiaoxing Liu
  • Longmiao Qiu

Abstract

An agent-based model is proposed, constructing an evolutionary banking system, where interbank loans and investment strategies are, respectively, determined by liquidity shortage and utility maximization. The causes of systemic risk are then explored based on the evolutionary banking system, which is calibrated by a sample from China. The regulatory interventions indicate the positive effects of increased investment assets, while the negative but inappreciable effects of increased interbank counterparties on contagion risks decrease. This observation hints at the possibility of promoting systemic stability by incentivizing more diversifications in investment assets instead of interbank counterparties. The results also demonstrate the advantages of prudential liquidity requirements, interbank liquidity facilities, and monetary policies from the central bank in promoting banking system stability.

Suggested Citation

  • Jingqian Tian & Chao Wang & Xiaoxing Liu & Longmiao Qiu, 2021. "Contagion Risks and Systemic Stability in Financial Networks," Mathematical Problems in Engineering, Hindawi, vol. 2021, pages 1-9, November.
    • Handle: RePEc:hin:jnlmpe:6123989
    DOI: 10.1155/2021/6123989
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    Cited by:

    1. Qian, Qian & Chao, Xiangrui & Feng, Hairong, 2023. "Internal or external control? How to respond to credit risk contagion in complex enterprises network," International Review of Financial Analysis, Elsevier, vol. 87(C).

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