Control of Interbank Contagion Under Partial Information

Amini, Hamed; Minca, Andreea; Sulem, Agnès

doi:10.1137/140981538

Cited by 22 publications

(23 citation statements)

References 35 publications

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“…Our paper is complementary to the line of research on the control of contagion, e.g., [3,14,15]. In these works, a central party, for example a regulator or government, seeks to minimize contagion.…”

Section: Introductionmentioning

confidence: 95%

Optimal connectivity for a large financial network

2017

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Abstract. We investigate network formation for a set of financial institutions represented as nodes.Linkages are source of income, and at the same time they bear the risk of contagion. The optimal connectivity of the nodes results from a game, in which the risk of contagion depends on the choices of all nodes in the system. Our financial network model can be interpreted as a set of banks connected through funding relations, in which a node's threshold to contagion is represented by its external funding capacity. A second interpretation is that of a set of insurers connected through reinsurance contracts, in which the threshold to contagion is represented by their capital. Our results show that when the threshold distribution across the nodes has higher variance, then, in equilibrium, the average connectivity is in general increasing, but the link failure probability decreases. This suggests that financial stability is best described in terms of the mechanism of network formation than in terms of simple statistics of the network topology like the average connectivity.Résumé. Onétudie la formation d'un réseau financier dont les noeuds représentent des institutions financières. Les liens sont sources de revenus maiségalement de risque de contagion de défaut. La connectivité optimale du réseau résulte d'un jeu, dans lequel le risque de contagion dépend de tous les noeuds du système. Notre réseau peutêtre interprété comme un ensemble de banques connectées entre elles par des relations de financement, le seuil de contagion de défaut pour une banque représentant ici sa capacité de financement extérieur. On peut aussi appliquer notre modèleà l'étude d'un réseau d'assureurs connectés par des contrats de réassurance, pour lesquels le seuil de contagion de chaque noeud est son capital. Nos résultats montrent que lorsque la distribution du seuil de contagion de défaut sur l'ensemble des noeuds a une grande variance, la connectivité moyenne croit, alors que la probabilité de défaut décroit. Cela suggère que l'étude de la stabilité financière d'un réseau financier doit prendre en compte le mécanisme de formation du réseau et pas seulement sa connectivité moyenne.

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Section: Introductionmentioning

confidence: 95%

Optimal connectivity for a large financial network

2017

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“…Our paper is also related to the literature where various mechanisms may reinforce network contagion, e.g, [20,1,17,2,3,5], and the literature on price mediated contagion in networks of common asset holdings [8,9].…”

Section: Introductionmentioning

confidence: 95%

To Fully Net or Not to Net: Adverse Effects of Partial Multilateral Netting

Amini

Filipović

Minca

2016

Operations Research

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We study a financial network where forced liquidations of an illiquid asset have a negative impact on its price, thus reinforcing network contagion. We prove uniqueness of the clearing asset price and liability payments under no, partial, and full multilateral netting of interbank liabilities. We show that partial versus full multilateral netting increases bank shortfall, and reduces clearing asset price and aggregate bank surplus. We also show that partial multilateral netting can be worse than no netting at all.

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“…As before, we give fluid limits for the Markov processes governing the number of surviving nodes in each category. Given this, one can find an optimal control strategy by introducing a tradeoff for the controller as in [6]: the controller can increase the growth intensity at a certain cost. Determining the optimal growth intensity as a state-dependent process is left for future research.…”

Section: Further Extensionsmentioning

confidence: 99%

A Dynamic Contagion Risk Model With Recovery Features

2019

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We introduce threshold growth in the classical threshold contagion model, or equivalently a network of Cramér-Lundberg processes in which nodes have downward jumps when there is a failure of a neighboring node. Choosing the configuration model as underlying graph, we prove fluid limits for the baseline model, as well as extensions to the directed case, state-dependent interarrival times and the case of growth driven by upward jumps. We obtain explicit ruin probabilities for the nodes according to their characteristics: initial threshold and in-(and out-) degree. We then allow nodes to choose their connectivity by trading off link benefits and contagion risk. We define a rational equilibrium concept in which nodes choose their connectivity according to an expected failure probability of any given link, and then impose condition that the expected failure probability coincides with the actual failure probability under the optimal connectivity. We show existence of an asymptotic equilibrium as well as convergence of the sequence of equilibria on the finite networks. In particular, our results show that systems with higher overall growth may have higher failure probability in equilibrium.

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Control of Interbank Contagion Under Partial Information

Cited by 22 publications

References 35 publications

Optimal connectivity for a large financial network

Optimal connectivity for a large financial network

To Fully Net or Not to Net: Adverse Effects of Partial Multilateral Netting

A Dynamic Contagion Risk Model With Recovery Features

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