Interbank Runs: A Network Model of Systemic Liquidity Crunches

50 Pages Posted: 27 Jan 2018 Last revised: 15 Mar 2022

See all articles by Yinan Su

Yinan Su

Johns Hopkins University - Carey Business School

Date Written: March 8, 2022

Abstract

This paper models systemic liquidity crunches on interbank lending networks, and studies how the network structure affects the instability. Interbank runs are modeled as a coordination failure, in which banks run on banks as they mutually reinforce each other to withdraw interbank lending. A mean-field approximation reduces the complex strategic interactions on networks down to a one-dimensional characterization of the system-wide dynamics. It explains how lending-borrowing relationships not only channel the "ripple'" effects of local shocks, but also connect the whole network into a self-fulfilling "tsunami". I demonstrate applications in network-based systemic risk measurement and management.

Keywords: Networks, Bank Runs, Interbank, Mean-field Approximation, Systemic Risk, Liquidity Crises

JEL Classification: G01, G20, D85

Suggested Citation

Su, Yinan, Interbank Runs: A Network Model of Systemic Liquidity Crunches (March 8, 2022). Available at SSRN: https://ssrn.com/abstract=3104982 or http://dx.doi.org/10.2139/ssrn.3104982

Yinan Su (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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