Financial Contagion ,Interbank Market, and Central Bank Policy

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Rashidi Ravari, Pooya | 2018

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 50931 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Madanizadeh, Ali; Mahmoodzadeh, Amineh
Abstract:
Financial distress can propagate through different channels such as bank run, deposit interbank market,networks and asset prices. In this paper, with the assumption of deposit insurance, no linkages between banks, no deposit interbank market and fixed asset prices, we show that asset-side shocks might propagate through both loan interbank market and deposit market. However, when there is aggregate liquidity surplus in the banking system, loan interbank market results in the first best allocation. In contrast, aggregate liquidity shortage does not result in optimum allocation. In the presence of deposit and loan interbank market, not only shocks propagate but also they are magnified with the increased interest rate in the loan interbank market and increased deposit rates. We also show that the best policy for central bank market for preventing inefficient allocation and increasing profit of the banking system is Rate
Cap and Interest Rate policies
Keywords:
Contagion ; Deposit Market ; Central Bank ; Liquidity Shock ; Banks Competition ; Interbank Market