A0820
Title: Systemic liquidity risk in the interbank network
Authors: Gerardo Ferrara - Bank of England (United Kingdom) [presenting]
Sam Langfield - European Central Bank (Germany)
Zijun Liu - Bank of England (United Kingdom)
Tomohiro Ota - Goldman Sachs (Japan)
Abstract: UK banks' systemic liquidity risk is studies by using a unique dataset on banks' daily cash flows and short-term interbank funding. We identify banks that fall short of liquidity owing to idiosyncratic stress (individually illiquid banks) and banks that fall short of liquidity because their bank counterparties fail to repay debts (systemically illiquid banks). To do this, we simulate a dynamic model in which illiquidity externalities propagate in the interbank network over multiple days. This modelling approach allows us to identify liquidity SIFIs the failure of which would have a significant impact on other banks through liquidity contagion. We also calculate the optimal distribution of liquid assets between banks when the total amount of liquid assets available is limited, and show that the impact of a liquidity crisis will be reduced when liquidity contagion risk is taken into consideration.
