Financial Fragility and Interbank Structure

Yalan Feng

Abstract


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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DOI: https://doi.org/10.5430/afr.v7n3p138

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Accounting and Finance Research
ISSN 1927-5986 (Print)   ISSN 1927-5994 (Online)

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