Systemic risk on different interbank network topologies

Abstract

In this paper we develop an interbank market with heterogeneous nancial institutions that enter into lending agreements on dierent network structures. Credit relationships (links) evolves endogenously via a tness mechanism based on agents performance. By changing the agent's trust on its neighbor's performance, interbank linkages self-organize themselves into very dierent network architectures, ranging from random to scale-free topologies. We study which network architecture can make the nancial system more resilient to random attacks and how systemic risk spreads over the network. To perturb the system, we generate a random attack via a liquidity shock. The hit bank is not automatically eliminated, but its failure is endogenously driven by its incapacity to raise liquidity in the interbank network. Our analysis shows that a random nancial network can be more resilient than a scale free one in case of agents' heterogeneity.

Financial regulations and bank credit to the real economy

“…(2012)) as sources of contagion. A few studies have considered possible feedback loops between the macro-economy and the financial sector (Lenzu and Tedeschi (2012), Battiston et. al.…”

Determination of Systemically Important Companies with Cross-Shareholding Network Analysis: A Case Study from an Emerging Market

“…The focus of the second group is on the correlation-based networks and the analysis of the structure of a financial market in different time periods [7,8]. Most research in the field falls into the third group that analyzes the structure of inter-bank debt networks in different countries and proposes various prudential policies to mitigate financial systemic risk and its associated costs [9][10][11][12]. In this type of studies, inter-bank debt networks are introduced as scale-free networks that also have the "small world" characteristics.…”

From banks' strategies to financial (in)stability

“…It represents the "intensity of choice" and answers the question on how much financial institutions trust the information about other agents' performance. For 0 < β < 1 differences in fitness are smoothed, unchanged for β = 1 and amplified for β > 1 (Domencich et al 1975;Lenzu and Tedeschi 2012). The algorithm is designed so that successful banks gain a higher number of incoming links.…”

“…Indeed, when the agents' balance sheets are heterogeneous, banks are not uniformly exposed to their counter-party. Therefore, if contagion is triggered by the failure of a big bank, which represents the highest source of exposure for its creditors, the situation is certainly worse than when agents are homogeneous (see Iori et al 2006;Caccioli et al 2012; Lenzu and Tedeschi 2012;Tedeschi et al 2012). On the other hand, the probability of default in credit markets is strictly linked to the presence of highly leveraged agents (see Gonzalez 2013;Gonzalez and Gonzalez 2014).…”