ECB paper offers model of interbank contagion
Researchers say policymakers can use their work to prevent and manage financial crises
A working paper published by the European Central Bank presents a model analysing how banks should adjust capital to minimise contagion from financial shocks.
In On the optimal control of interbank contagion in the euro area banking system, Gábor Fukker and Christoffer Kok say they build on “ideas from combinatorial optimization” about controlling financial contagion. They add what they call “three plausible types of fire sale mechanisms” to the model.
The authors then give the results of a
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