Financial Fragility and Interbank Structure | Zendy

Yalan Feng | Zendy

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Financial Fragility and Interbank Structure

Author(s) -

Yalan Feng

Publication year - 2018

Publication title -

accounting and finance research

Language(s) - English

Resource type - Journals

eISSN - 1927-5994

pISSN - 1927-5986

DOI - 10.5430/afr.v7n3p138

Subject(s) - financial fragility , fragility , market liquidity , economics , moral hazard , robustness (evolution) , replicate , liquidity preference , monetary economics , financial crisis , microeconomics , incentive , macroeconomics , biochemistry , chemistry , statistics , mathematics , gene

This paper follows Allen and Gale (2000) to model financial contagion as an equilibrium phenomenon. I assume a two-country economy where banks in each country hold interregional claims on other banks to provide insurance against liquidity preference shocks. The results completely replicate Allen-Gale model. To further test the relative robustness of different market structures I test the implication of moral hazard as in Brusco and Castiglionesi (2007). I find that under certain situation, complete and incomplete structures are equally fragile.

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