Network Structure and Systemic Risk in Banking Systems

Abstract

We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index.We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution's contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining its systemic importance. These observations plead for capital requirements which depend on exposures, rather than aggregate balance sheet size, and which target systemically important institutions.

The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks

“…At the same time, they construct an efficient algorithm for the computation of the clearing vector. Closely related empirical studies can, e.g., be found in Cont et al (2013), Elsinger et al (2006), Glasserman and Young (2015), and Upper (2011). These cast doubt that empirical patterns of contagious defaults can solely be explained by networks of nominal liabilities.…”

Banks’ Vulnerability and Financial Openness across Central and Eastern Europe

“…More recently, authors developed measures to identify SIFIs based on interbank positions (Drehmann and Tarashev, 2013), sovereign interlinkages (Correa et al, 2014), cross-border linkages (Minoiu et al, 2015) or network analysis (Cont et al, 2013;Hautsch et al, 2015;Betz et al, 2016). Also, this paper fits to research on regulatory incentives which highlight that financial stability can be significantly influenced by regulatory regimes (Weiβ et al, 2014), deposit insurance arrangements (Anginer et.…”

Market procyclicality and systemic risk

“…Indeed, network density has been found to be a major driver of systemic risk (see e.g., Battiston et al, 2012a,b;Tasca and Battiston, 2011). There is also a body of empirical evidence that suggests that financial networks typically display a core-periphery structure with a dense core and a sparsely connected periphery (see e.g., Battiston et al, 2012c;Cont et al, 2011;Iori et al, 2006;Vitali et al, 2011). In the following, our aim is to describe the dynamics of the banks in the core of a core-periphery structure.…”