Bankruptcy cascades in interbank markets

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

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.

MeSH terms

  • Algorithms
  • Bankruptcy*
  • Capitalism
  • Computer Simulation
  • Data Interpretation, Statistical
  • Humans
  • Models, Economic*
  • Risk Sharing, Financial*

Grants and funding

The authors have no support or funding to report.