The Dynamics of Closeness and Betweenness

Buechel, Berno; Buskens, Vincent

doi:10.1080/0022250x.2011.597011

Cited by 30 publications

(22 citation statements)

References 33 publications

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“…For these cases network analysis provides some concepts and metrics that may assist the assessment of substitutability. An interesting concept is betweenness centrality (Newman, 2010 andBuechel and Buskens, 2008;de Nooy et al, 2005), which is a measure of a network's resilience based on the assessment of the involvement of a participant in the indirect connection of all other participants. Betweenness centrality is implemented in León and Machado (2013) and León and Murcia (2012) for assessing substitutability.…”

Section: Substitutabilitymentioning

confidence: 99%

Macro-prudential assessment of Colombian financial institutions' systemic importance

Rincon

Machado

Murcia

2013

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This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis.The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution.The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution's systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making.

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Section: Substitutabilitymentioning

confidence: 99%

Macro-prudential assessment of Colombian financial institutions' systemic importance

Rincon

Machado

Murcia

2013

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“…no other vertex or vertices are able to fulfill its role), vertex A is not relevant (i.e. the geodesic path does not includes vertex A), and vertex D is substitutable but with an increase in the distance between C and H. This result is relevant and emphasizes the importance of considering both connectedness and substitutability: degree centrality 28 Buechel and Buskens (2008) suggest assigning a number larger than any possible actual distance in the network for those pairs of vertices that cannot reach each other, and choose to use ; this is also the authors' choice. Figure A3's vertex E as of lower systemic importance than D (i.e.…”

Section: Substitutabilitymentioning

confidence: 99%

Systemic importance index for financial institutions: a principal component analysis approach

León¹,

Murcia²

2012

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As a result of the most recent global financial crisis literature has embraced size, connectedness and substitutability as key indicators for financial institutions' systemic importance. Despite the intuitiveness of these concepts, identifying systemic important institutions remain a non-trivial task that implies two primary challenges.First, designing metrics for connectedness and substitutability may require, as acknowledged by literature, non-standard data sources and techniques. Second, choosing a methodology capable of aggregating the metrics designed for the three aforementioned concepts into a systemic importance index may be intricate.The herein paper addresses the second challenge. The chosen approach is to apply Principal Components Analysis to the metrics designed by León and Machado (2011) for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system's information.Results (i) demonstrate that the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions' relative systemic importance; (ii) allow for constructing a PCA-based Systemic Importance Index, a valuable tool for financial authorities' policy and decision-making; and (iii) confirm the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case.

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“…For these cases network theory provides some concepts and metrics that may assist the assessment of substitutability. An interesting concept is betweenness centrality (Newman, 2010 and2003;Buechel and Buskens, 2008;de Nooy et al, 2005), which is a measure of a network's resilience based on the assessment of the involvement of a participant in the -indirect-connection of all other participants.…”

Section: Substitutabilitymentioning

confidence: 99%

“…Neighbors (directly connected) have distance equal to 1; neighbors of neighbors that are not directly connected are at distance 2, and so forth. Source: authors' design, based on Buechel andBuskens (2008) andNewman (2003).…”

Section: Distancementioning

confidence: 99%

“…A key concept for assessing substitutability comes from network analysis' betweenness centrality. Betweenness centrality measures the brokerage role of a certain vertex within a network (Buechel and Buskens, 2008) or, as defined by de Nooy et al (2005), it captures the extent to which a vertex is needed as a link in the chain of contacts that facilitate the spread of information within a network; the more a vertex is a go-between, the more central its position in the network.…”

Section: Substitutabilitymentioning

confidence: 99%

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Designing an expert knowledge-based systemic importance index for financial institutions

León-Rincón¹,

Machado-Franco²,

León³

et al. 2011

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Defining whether a financial institution is systemically important (or not) is challenging due to (i) the inevitability of combining complex importance criteria such as institutions' size, connectedness and substitutability; (ii) the ambiguity of what an appropriate threshold for those criteria may be; and (iii) the involvement of expert knowledge as a key input for combining those criteria.The proposed method, a Fuzzy Logic Inference System, uses four key systemic importance indicators that capture institutions' size, connectedness and substitutability, and a convenient deconstruction of expert knowledge to obtain a Systemic Importance Index.This method allows for combining dissimilar concepts in a non-linear, consistent and intuitive manner, whilst considering them as continuous -non binary-functions. Results reveal that the method imitates the way experts them-selves think about the decision process regarding what a systemically important financial institution is within the financial system under analysis.The Index is a comprehensive relative assessment of each financial institution's systemic importance. It may serve financial authorities as a quantitative tool for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. It may also serve for enhanced policy-making (e.g. prudential regulation, oversight and supervision) and decisionmaking (e.g. resolving, restructuring or providing emergency liquidity).

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The Dynamics of Closeness and Betweenness

Cited by 30 publications

References 33 publications

Macro-prudential assessment of Colombian financial institutions' systemic importance

Macro-prudential assessment of Colombian financial institutions' systemic importance

Systemic importance index for financial institutions: a principal component analysis approach

Designing an expert knowledge-based systemic importance index for financial institutions

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