A1245
Title: Modelling contagious bank runs
Authors: Luitgard Veraart - London School of Economics and Political Science (United Kingdom) [presenting]
Abstract: The purpose is to develop a modelling framework for contagion in financial networks arising from bank runs. It is shown how interacting channels of contagion, namely, funding withdrawals in the interbank network and price-mediated contagion arising from fire sales, can turn a bank run on one institution into a systemic crisis. Furthermore, it is also modelled how contagion effects can lead to additional bank runs. The model allows for a wide range of withdrawal mechanisms, both by banks and by external depositors. It can be used for financial stress testing and particularly for analyzing implications of different withdrawal mechanisms for systemic risk. This is illustrated in stylized examples and an empirical case study. It is found that the extent of systemic risk is highly sensitive to the choices of withdrawal strategies used by the market participants. Policy implications are also discussed.
