Contagion in financial networks

2010 ◽  
Vol 466 (2120) ◽  
pp. 2401-2423 ◽  
Author(s):  
Prasanna Gai ◽  
Sujit Kapadia
Keyword(s):  
Analytical Model ◽  
Network Structure ◽  
Market Liquidity ◽  
Asset Market ◽  
Financial Networks ◽  
Financial Systems ◽  
Arbitrary Structure ◽  
Idiosyncratic Shocks ◽  
Potential Impact ◽  
Robust Yet Fragile

This paper develops an analytical model of contagion in financial networks with arbitrary structure. We explore how the probability and potential impact of contagion is influenced by aggregate and idiosyncratic shocks, changes in network structure and asset market liquidity. Our findings suggest that financial systems exhibit a robust-yet-fragile tendency: while the probability of contagion may be low, the effects can be extremely widespread when problems occur. And we suggest why the resilience of the system in withstanding fairly large shocks prior to 2007 should not have been taken as a reliable guide to its future robustness.

scholarly journals Shock Transmission Through Cross-Border Bank Lending: Credit and Real Effects

2019 ◽  
Vol 33 (10) ◽  
pp. 4839-4882 ◽  
Author(s):  
Galina Hale ◽  
Tümer Kapan ◽  
Camelia Minoiu
Keyword(s):  
Bank Lending ◽  
Banking Crises ◽  
Financial Networks ◽  
Financial Shocks ◽  
Real Effects ◽  
Cross Border ◽  
International Bank ◽  
Idiosyncratic Shocks ◽  
Shock Transmission ◽  
Using Data

Abstract We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997–2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

scholarly journals Mitigation of cascading failures in complex networks

2020 ◽  
Vol 10 (1) ◽  
Author(s):  
Alex Smolyak ◽  
Orr Levy ◽  
Irena Vodenska ◽  
Sergey Buldyrev ◽  
Shlomo Havlin
Keyword(s):  
Complex Networks ◽  
Network Structure ◽  
Failure Mechanisms ◽  
Local Network ◽  
Financial Networks ◽  
Cascading Failures ◽  
Real Network ◽  
Critical Nodes ◽  
System Collapse ◽  
Mitigation Techniques

Abstract Cascading failures in many systems such as infrastructures or financial networks can lead to catastrophic system collapse. We develop here an intuitive, powerful and simple-to-implement approach for mitigation of cascading failures on complex networks based on local network structure. We offer an algorithm to select critical nodes, the protection of which ensures better survival of the network. We demonstrate the strength of our approach compared to various standard mitigation techniques. We show the efficacy of our method on various network structures and failure mechanisms, and finally demonstrate its merit on an example of a real network of financial holdings.

A note on liquidity policies and financial networks

2019 ◽  
Vol 11 (3) ◽  
pp. 451-456
Author(s):  
Danilo Lopomo Beteto Wegner
Keyword(s):  
Central Bank ◽  
Design Methodology ◽  
Banking System ◽  
Market Liquidity ◽  
Financial Networks ◽  
Bank Failures ◽  
Quantitative Easing ◽  
Content Type ◽  
Net Worth ◽  
Liquidity Provision

Purpose This paper aims to provides an example of how government and central bank policies that promote market liquidity (e.g., quantitative easing programs) can change the structure of the banking system. Design/methodology/approach The nexus between liquidity policies and financial networks is addressed through an example that captures stylized features of the interbank market. In the example discussed, two scenarios are considered: one with and another without central bank/government liquidity provision, leading to two different network structures that are then used to study the likelihood of contagion. Findings The example provided shows that government and central bank policies that promote market liquidity can lead to financial networks that are better capitalized (net worth of the banking system is higher) but, at the same time, more fragile (higher likelihood of bank failures). Originality/value To the best of the author’s knowledge, this is the first attempt to model the formation of a financial network with an explicit mechanism accounting for government and central bank policies that affect market liquidity, which, in turn, could be interpreted as a quantitative easing program.

scholarly journals Financial Networks and Contagion

2014 ◽  
Vol 104 (10) ◽  
pp. 3115-3153 ◽  
Author(s):  
Matthew Elliott ◽  
Benjamin Golub ◽  
Matthew O. Jackson
Keyword(s):  
Network Structure ◽  
Financial Networks ◽  
Trade Offs ◽  
Asset Values ◽  
Nonmonotonic Effects

We study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another's failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate the model with data on European debt cross-holdings. (JEL D85, F15, F34, F36, F65, G15, G32, G33, G38)

scholarly journals Approximational Projection of a Network with an Arbitrary Structure

2018 ◽  
Vol 7 (3.2) ◽  
pp. 550
Author(s):  
Valerii Usenko ◽  
Olga Kodak ◽  
Iryna Usenko
Keyword(s):  
Network Structure ◽  
Large Scale ◽  
System Parameters ◽  
Arbitrary Structure ◽  
Large Scale Networks ◽  
Definition Of

Improving the efficiency of the functioning of the engineering networks of cities involves solving the issues of expanding and deepening the process of studying the interconnection of its components.An approximate definition of the property of the network structure's connectivity belongs to the conceptual class of diminishing the dimension of the multiplicity of system parameters. It studies the structures of networks with arbitrary reliability of its constituent parts. The reflection of the reliability values of the components of a redundant engineering network structure is appropriate for large-scale networks. The multiplicity of the network is projected onto the subspace of its parameters with variable values of the argument of the function of the integrity of the connectivity.  

Computational Models of Financial Networks, Risk, and Regulatory Policies

2018 ◽  
Author(s):  
Kimmo Soramäki
Keyword(s):  
Financial Risk ◽  
Computational Models ◽  
Complex Structure ◽  
Financial Networks ◽  
Financial Systems ◽  
Regulatory Policies ◽  
Research Areas ◽  
Correlation Networks ◽  
Active Research ◽  
Asset Correlation

This chapter introduces the concept of financial networks and reviews research in three of the most active research areas of financial systems: interbank payment networks, interbank exposure networks, and asset correlation networks. The financial crisis of 2007-2008 revealed the intertwined nature of modern financial systems. A promising methodology for capturing and modeling connections in the financial system is provided by network theory. The intricate structure of linkages between financial institutions, among sectors of the economy, and across financial systems can conveniently be captured by using a network representation. Empirical research on describing existing networks is presented, as well as new modeling and simulation approaches for financial risk that take into account the complex structure of financial markets and infrastructures.

scholarly journals Networks and webs in ecosystems and financial systems

2013 ◽  
Vol 371 (1987) ◽  
pp. 20120376 ◽  
Author(s):  
Robert M. May
Keyword(s):  
Mathematical Models ◽  
Network Structure ◽  
Real World ◽  
Systemic Risk ◽  
Financial Systems ◽  
Paper Briefly ◽  
Recent Interest ◽  
Regulatory Measures ◽  
Dynamical Properties ◽  
Similarities And Differences

This paper briefly outlines our growing understanding of the relationships between the network structure of ecological networks—both in mathematical models and in the real world—and their consequent dynamical properties. These are interesting, inter alia, because they affect the system’s ability to withstand disturbance, whether natural or human-created. The paper also sketches recent interest in the potential relevance of this work to ‘systemic risk’ and regulatory measures in banking systems, emphasizing the similarities and differences. I conclude with some cautions against drawing excessively general conclusions from any such models.

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