Modeling and Mathematical Analysis of Liquidity Risk Contagion in the Banking System

Abstract

In recent times, all world banks have been threatened by the liquidity risk problem. This phenomenon represents a devastating financial threat to banks and may lead to irrecoverable consequences in case of negligence or underestimation. In this article, we study a mathematical model that describes the contagion of liquidity risk in the banking system based on the SIR epidemic model simulation. The model consists of three ordinary differential equations illustrating the interaction between banks susceptible or affected by liquidity risk and tending towards bankruptcy. We have demonstrated the bornness and positivity of the solutions, and we have mathematically analyzed this system to demonstrate how to control the banking system’s stability. Numerical simulations have been illustrated by using real data to support the analytical results and prove the effects of different system parameters studied on the contagion of liquidity risk.