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Systemic Risk and Interbank Lending

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  • Li-Hsien Sun

Abstract

We propose a simple model of the banking system incorporating a game feature where the evolution of monetary reserve is modeled as a system of coupled Feller diffusions. The Markov Nash equilibrium generated through minimizing the linear quadratic cost subject to Cox-Ingersoll-Ross type processes creates liquidity and deposit rate. The adding liquidity leads to a flocking effect but the deposit rate diminishes the growth rate of the total monetary reserve causing a large number of bank defaults. In addition, the corresponding Mean Field Game and the infinite time horizon stochastic game with the discount factor are also discussed.

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  • Li-Hsien Sun, 2016. "Systemic Risk and Interbank Lending," Papers 1611.06672, arXiv.org, revised Mar 2017.
    • Handle: RePEc:arx:papers:1611.06672
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    Cited by:

    1. Aditya Maheshwari & Andrey Sarantsev, 2017. "Modeling Financial System with Interbank Flows, Borrowing, and Investing," Papers 1707.03542, arXiv.org, revised Oct 2018.
    2. Li-Hsien Sun, 2019. "Systemic Risk and Heterogeneous Mean Field Type Interbank Network," Papers 1907.03082, arXiv.org, revised Sep 2019.

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