An Equilibrium Model of Interbank Networks Based on Variational Inequalities

Abstract EN

We develop an equilibrium model of credit network and trust network in the interbank market.

We consider two kinds of decision makers including banks with liquidity surplus and banks with liquidity shortage.

We model the behavior of the decision makers, derive the equilibrium conditions, and establish the variational inequality formulation for interbank credit network and trust network.

We then utilize the variational inequality formulation to obtain qualitative properties of the equilibrium pattern in terms of existence and uniqueness.