Systemic Risk in an Interconnected Banking System with Endogenous Asset Markets

SAFE Working Paper No. 48

50 Pages Posted: 8 Apr 2014

Date Written: March 30, 2014

Abstract

We analyze the emergence of systemic risk in a network model of interconnected bank balance sheets. The model incorporates multiple sources of systemic risk, including size of financial institutions, direct exposure from interbank lendings, and asset fire sales. We suggest a new macroprudential risk management approach building on a system wide value at risk (SVaR). Under the SVaR metric, the contribution of individual banks to systemic risk is well defined and can be approximated by a Shapley value-type measure. We show that, in a SVaR regime, a fair systemic risk charge which is proportional to a bank's individual contribution to systemic risk diverges from the optimal macroprudential capitalization of the banks from a planner's perspective. The results have implications for the design of macroprudential capital surcharges.

Keywords: systemic risk, systemic risk charge, macroprudential supervision, Shapley value, financial network

JEL Classification: C15, G01, G21, G28

Suggested Citation

Bluhm, Marcel and Krahnen, Jan Pieter, Systemic Risk in an Interconnected Banking System with Endogenous Asset Markets (March 30, 2014). SAFE Working Paper No. 48, Available at SSRN: https://ssrn.com/abstract=2421265 or http://dx.doi.org/10.2139/ssrn.2421265

Marcel Bluhm (Contact Author)

The Block ( email )

New York
United States

Jan Pieter Krahnen

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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