We extend the Schumpeter meeting Keynes (K+S) agent-based model by introducing an evolving interbank network in the money market. Banks are exposed to counterparty risk and evaluate interbank positions using a network valuation (NEVA) clearing mechanism, which ensures systemic risk minimization with minimal assumptions on banks’ behavior. The model can replicate several stylized facts about the topology of the interbank network and the dynamics of banks’ balance sheets. The model encompasses financial contagion and systemic risk, allowing us to study the interactions between micro- and macro-prudential policies. Our results suggest that the introduction of a micro-prudential regulation also accounting for the network structure can reduce the incidence of systemic risk events. We also find that, in presence of a two-pillar regulatory framework – grounded on a Basel III macro-prudential regulation and a NEVA-based micro-prudential one –, there is no trade-off between financial stability and macroeconomic performance. This points towards the possibility of designing a regulatory framework able to achieve financial stability without overly stringent capital requirements.

We study how the practice of collateral rehypothecation impacts the generation of liquidity and the emergence of systemic liquidity risk, and how both depend on the structure of the financial network. We build a basic model where banks interact via chains of “repo” contracts (i.e. repurchasing agreements) and use their proprietary collateral or re-use the collateral obtained by other banks via “reverse repos”. We then extend the model to allow banks to determine endogenously the optimal amount of collateral to rehypothecate, based on the equilibrium level of Value-at-Risk. In this framework, we first show how total collateral volume and its velocity are affected by characteristics of the network such as the length of rehypothecation chains and the existence of closed (i.e. cyclic) chains of contracts, the presence of sink nodes (wherein collateral remains trapped), the direction of collateral flows, and the density of the network. We then demonstrate that a trade-off between liquidity and systemic risk exists for certain classes of networks structures. On the one hand, we show that structures where collateral flows are concentrated among fewer densely connected nodes allow for larger collateral volumes, even at low levels of network density. On the other hand, the same networks are also more exposed to larger cascades of collateral hoarding, as a result of localized liquidity shocks.