Financial stability through self-quarantine vs. system regulation in the interbank market

Nicolas Scholtes, Morgan Edwards, Jennifer Hellmann, Ellsworth Campbell, Lin Li

Research output: Contribution in Book/Catalog/Report/Conference proceedingConference contribution

Abstract

The paper develops a dynamic network model of the interbank market focussing on
containment strategies for an initial shock engendering a cascading string of failures.
To do this, we begin with a system regulator possessing a fixed bank recapitalization
budget and information set vis-à-vis the network. We also consider self-quarantining
behaviour whereby individual banks respond to spreading failures by unilaterally cut-
ting ties to neighbors. Our results show that imperfect information affects the ability
of the regulator to contain larger shocks in the absence of self-quarantining behaviour. By contrast, self-quarantine and imperfect information appeared to complement one another, resulting in near-perfect system preservation.
Original languageEnglish
Title of host publicationFinancial stability through self-quarantine vs. system regulation in the interbank market
Number of pages15
Publication statusIn preparation - 2014

Fingerprint

Interbank market
Imperfect information
Quarantine
Financial stability
Network model

Cite this

Scholtes, N., Edwards, M., Hellmann, J., Campbell, E., & Li, L. (2014). Financial stability through self-quarantine vs. system regulation in the interbank market. Manuscript in preparation. In Financial stability through self-quarantine vs. system regulation in the interbank market
Scholtes, Nicolas ; Edwards, Morgan ; Hellmann, Jennifer ; Campbell, Ellsworth ; Li, Lin. / Financial stability through self-quarantine vs. system regulation in the interbank market. Financial stability through self-quarantine vs. system regulation in the interbank market. 2014.
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abstract = "The paper develops a dynamic network model of the interbank market focussing oncontainment strategies for an initial shock engendering a cascading string of failures.To do this, we begin with a system regulator possessing a fixed bank recapitalizationbudget and information set vis-{\`a}-vis the network. We also consider self-quarantiningbehaviour whereby individual banks respond to spreading failures by unilaterally cut-ting ties to neighbors. Our results show that imperfect information affects the abilityof the regulator to contain larger shocks in the absence of self-quarantining behaviour. By contrast, self-quarantine and imperfect information appeared to complement one another, resulting in near-perfect system preservation.",
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Scholtes, N, Edwards, M, Hellmann, J, Campbell, E & Li, L 2014, Financial stability through self-quarantine vs. system regulation in the interbank market. in Financial stability through self-quarantine vs. system regulation in the interbank market.

Financial stability through self-quarantine vs. system regulation in the interbank market. / Scholtes, Nicolas; Edwards, Morgan; Hellmann, Jennifer; Campbell, Ellsworth; Li, Lin.

Financial stability through self-quarantine vs. system regulation in the interbank market. 2014.

Research output: Contribution in Book/Catalog/Report/Conference proceedingConference contribution

TY - GEN

T1 - Financial stability through self-quarantine vs. system regulation in the interbank market

AU - Scholtes, Nicolas

AU - Edwards, Morgan

AU - Hellmann, Jennifer

AU - Campbell, Ellsworth

AU - Li, Lin

PY - 2014

Y1 - 2014

N2 - The paper develops a dynamic network model of the interbank market focussing oncontainment strategies for an initial shock engendering a cascading string of failures.To do this, we begin with a system regulator possessing a fixed bank recapitalizationbudget and information set vis-à-vis the network. We also consider self-quarantiningbehaviour whereby individual banks respond to spreading failures by unilaterally cut-ting ties to neighbors. Our results show that imperfect information affects the abilityof the regulator to contain larger shocks in the absence of self-quarantining behaviour. By contrast, self-quarantine and imperfect information appeared to complement one another, resulting in near-perfect system preservation.

AB - The paper develops a dynamic network model of the interbank market focussing oncontainment strategies for an initial shock engendering a cascading string of failures.To do this, we begin with a system regulator possessing a fixed bank recapitalizationbudget and information set vis-à-vis the network. We also consider self-quarantiningbehaviour whereby individual banks respond to spreading failures by unilaterally cut-ting ties to neighbors. Our results show that imperfect information affects the abilityof the regulator to contain larger shocks in the absence of self-quarantining behaviour. By contrast, self-quarantine and imperfect information appeared to complement one another, resulting in near-perfect system preservation.

M3 - Conference contribution

BT - Financial stability through self-quarantine vs. system regulation in the interbank market

ER -

Scholtes N, Edwards M, Hellmann J, Campbell E, Li L. Financial stability through self-quarantine vs. system regulation in the interbank market. In Financial stability through self-quarantine vs. system regulation in the interbank market. 2014