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Edoardo Gaffeo, Lucio Gobbi and Massimo Molinari
''Liquidity contagion with a “first-in/first-out” seniority of claims''
( 2019, Vol. 39 No.4 )
Building upon Lee (2013), this paper puts forward a methodological issue and presents a simple numerical example showing that the extent of systemic liquidity shortages due to a contagious funding run is strictly dependent on the seniority assigned to the different categories of claimants wishing to withdraw funds from financial intermediaries. In more detail, we find that a clearing payment algorithm based on the priority of interbank debt over depositors is found to potentially underestimate such liquidity shortages, if compared to a seniority rule working the other way round. This aspect may be of interest for supervisors implementing macro-prudential stress-testing exercises.
Keywords: Financial contagion, Seniority of payments, Liquidity shortages
JEL: G2 - Financial Institutions and Services: General
C6 - Mathematical Methods and Programming: General
Manuscript Received : Dec 11 2018 Manuscript Accepted : Nov 12 2019

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