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Assessing the stability of economic systems is a fundamental research focusin economics, that has become increasingly interdisciplinary in the currentlytroubled economic situation. In particular, much attention has been devoted tothe interbank lending market as an important diffusion channel for financialdistress during the recent crisis. In this work we study the stability of theinterbank market to exogenous shocks using an agent-based network framework.Our model encompasses several ingredients that have been recognized in theliterature as pro-cyclical triggers of financial distress in the bankingsystem: credit and liquidity shocks through bilateral exposures, liquidityhoarding due to counterparty creditworthiness deterioration, target leveragingpolicies and fire-sales spillovers. But we exclude the possibility of centralauthorities intervention. We implement this framework on a dataset of 183European banks that were publicly traded between 2004 and 2013. We document theextreme fragility of the interbank lending market up to 2008, when a systemiccrisis leads to total depletion of market equity with an increasing speed ofmarket collapse. After the crisis instead the system is more resilient tosystemic events in terms of residual market equity. However, the speed at whichthe crisis breaks out reaches a new maximum in 2011, and never goes back tovalues observed before 2007. Our analysis points to the key role of the crisisoutbreak speed, which sets the maximum delay for central authoritiesintervention to be effective.

How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation