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PLoS One. 2012;7(12):e52749. doi: 10.1371/journal.pone.0052749. Epub 2012 Dec 31.

Bankruptcy cascades in interbank markets.

Author information

1
Department of Economics, Universitá Politecnica delle Marche, Ancona, Italy. g.tedeschi@univpm.it

Abstract

We study a credit network and, in particular, an interbank system with an agent-based model. To understand the relationship between business cycles and cascades of bankruptcies, we model a three-sector economy with goods, credit and interbank market. In the interbank market, the participating banks share the risk of bad debits, which may potentially spread a bank's liquidity problems through the network of banks. Our agent-based model sheds light on the correlation between bankruptcy cascades and the endogenous economic cycle of booms and recessions. It also demonstrates the serious trade-off between, on the one hand, reducing risks of individual banks by sharing them and, on the other hand, creating systemic risks through credit-related interlinkages of banks. As a result of our study, the dynamics underlying the meltdown of financial markets in 2008 becomes much better understandable.

PMID:
23300760
PMCID:
PMC3534113
DOI:
10.1371/journal.pone.0052749
[Indexed for MEDLINE]
Free PMC Article
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