Prof. Tomoyuki Ichiba (PSTAT/CRFMS-UCSB)

Title: Modeling a systemic risk of frozen inter-bank lending

Abstract: In this talk we propose a simple model of banking system and analyze a systemic risk of frozen inter-bank lending. The monetary reserves of banks are modeled as a system of interacting Feller diffusion. The model is simple enough for mathematical analysis, yet captures how lending preferences of banks cause possible multiple bank failures. We quantify the lending preference from one bank to another as a function of all the reserves. We find an extreme example that only k out of n banks can survive. This banking system induces a class of random graph processes in continuous time. We may extend this toy model for understanding the systemic risk and for preventing crisis in the banking system. (joint work with Jean-Pierre Fouque and Chunkai Gao).