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Systemic RiskThe Dynamics of Modern Financial Systems$
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Prasanna Gai

Print publication date: 2013

Print ISBN-13: 9780199544493

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199544493.001.0001

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Systemic Liquidity Crises

Systemic Liquidity Crises

Chapter:
(p.28) (p.29) 3 Systemic Liquidity Crises
Source:
Systemic Risk
Author(s):

Prasanna Gai

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199544493.003.0003

This chapter develops a model of interbank lending in which unsecured claims, repo market activity, and shocks to haircuts applied to collateral assume centre-stage. Systemic liquidity crises of the kind witnessed during 2007–8 are shown to arise in such a framework. The model illustrates how the complexity and concentration of a financial network can act to amplify its knife-edge properties. It also discusses how a range of policy measures, including tougher liquidity regulation and surcharges for systemically important financial institutions (SIFIs) could make the financial system more resilient.

Keywords:   liquidity regulation, repo haircuts, core funding ratio, systemic liquidity crises, systemically important financial institutions (SIFIs)

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