A Liquidity Risk Analysis And A Measure Of Systemic Risk Via The Weighted Shapley Value

By financing with highly liquid deposits, banks invest in long-term assets with low liq-uidity. In result, a liquidity risk roots in such term mismatch. Even "healthy" banks can fail on condition that they cannot roll over maturing debt. If there is a sudden increase of uncertainty over the bank’s solvency for investors, the liquidity hoarding or bank-runs may arise, leading to a liquidity risk or bankruptcy. This article investigates the influences of the contingencies of the marketplace (finance shocks) on market interest rate through a three-bank game mod-el with incomplete information. We found that the short-term creditors will require a higher risk compensation for rollover interest rate when confronting a greater uncertainty for bank financial situation. Especially, when the level of uncertainty exceeds a threshold value, the short-term creditors will refuse to roll over debt no matter how high the continuation rate the bank will provide. If there is no government aid, banks go bankrupt due to draining liquidity, such as the Lehman Brothers. If regulators are able to eliminate the information asymmetry or provide liquidity as the lender of last resort, strains on the liquidity of banks will be eased, such as the Northern Rock Bank.In fact, deposit insurance system being improving day by day which is originated from the financial crises and lender of the last resort policy have played a key role in helping stabilize market sentiment and restoring market order. However, a macro prudential policy should be taken to cope with un-rational incentive and moral hazard, which are generated from these two policies. And regulators and scholars are interested in what we mentioned above. Macro prudential policies should deal with systemic risk from different levels. They need to prevent financial system runaway and impose restrictions on systemic risk accumulation. Meanwhile, to restrain the moral hazard problem, theoretically reliable and strongly practical regulating tools are needed to reasonably estimate the individual financing institution’s risks imposed on the system as a whole. These tools should find out the relationship between the individual financial institutions engaged in risky business activities in micro level and systemic risk as a whole in macro level. Thereby, we can inspect the accumulation of systemic risk from the perspective of financial system globally, prevent from financial risky events, differentiate risk-based regulation policies from the perspective of individual financing institutions and Inhibit moral selection incentives.A macro-prudential approach to financial regulation should reasonably evaluate the sys-temic risk of individual institutions. The intricate network of claims and obligations inside the modern financial systems pose challenges to regulators in identifying individual institution’s systemic risk. We introduce a measure of the systemic risk of interconnected banks using the weighted Shapley value, which characterises banks’ systemic risk by capturing two aspect-si (i) a bank’s risk exposure of primitive asset structure and (ii) its position in the interbank network. An empirical implementation reveals that the primitive asset structure and interbank connections are main drivers of each bank’s systemic risk. Importantly, when allocating the systemic risk to banks with interbank linkages, the weighted Shapley value accounts for not only potential excess marginal loss a bank imposes on other subsystems as the Shapley value does, but also increases in the joint default probability. In addition, different types of interbank linkages (debt or share) make significant difference in affecting an individual bank’s systemic risk.