Modeling and mathematical analysis of liquidity-credit risk contagion in the banking system.

Abstract

In this paper, we present a banking system model that includes liquidity and credit risks, inspired by infectious disease models. We consider a set of banks divided into four categories: healthy banks, distressed banks, bankrupt banks, and banks under special surveillance. The model is described by a system of four ordinary differential equations. We analyze the stability of this system using the Jacobian matrix and discuss the implications of the model’s parameters. Simulations are carried out for three European countries: Spain, France, and Germany, under different risk scenarios.