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Systemic risk on different interbank network topologies

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  • Lenzu, Simone
  • Tedeschi, Gabriele

Abstract

In this paper we develop an interbank market with heterogeneous financial institutions that enter into lending agreements on different network structures. Credit relationships (links) evolve endogenously via a fitness mechanism based on agents’ performance. By changing the agent’s trust on its neighbor’s performance, interbank linkages self-organize themselves into very different network architectures, ranging from random to scale-free topologies. We study which network architecture can make the financial 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 financial network can be more resilient than a scale free one in case of agents’ heterogeneity.

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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 391 (2012)
Issue (Month): 18 ()
Pages: 4331-4341

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Handle: RePEc:eee:phsmap:v:391:y:2012:i:18:p:4331-4341

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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Keywords: Interbank market; Dynamic network; Network resilience; Heterogeneity;

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Cited by:
  1. Eralba CELA & Tineke FOKKEMA & Elena AMBROSETTI, 2012. "Links Between Transnationalism Integration and Duration of Residence: The Case of eastern European Migrants in Italy," Working Papers 386, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  2. Spiros Bougheas & Alan P. Kirman, 2014. "Complex Financial Networks and Systemic Risk: A Review," CESifo Working Paper Series 4756, CESifo Group Munich.
  3. Teruyoshi Kobayashi, 2012. "Diversity among banks may increase systemic risk," Discussion Papers 1213, Graduate School of Economics, Kobe University.
  4. Leonardo Bargigli & Giovanni Di Iasio & Luigi Infante & Fabrizio Lillo & Federico Pierobon, 2013. "The Multiplex Structure of Interbank Networks," Working Papers - Economics wp2013_26.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  5. Kobayashi, Teruyoshi, 2014. "A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades," Economics Letters, Elsevier, vol. 124(1), pages 113-116.
  6. Fischer, Thomas & Riedler, Jesper, 2012. "Prices, debt and market structure in an agent-based model of the financial market," ZEW Discussion Papers 12-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Lengnick, Matthias & Krug, Sebastian & Wohltmann, Hans-Werner, 2012. "Money creation and financial instability: An agent-based credit network approach," Economics Working Papers 2012-15, Christian-Albrechts-University of Kiel, Department of Economics.
  8. Fabio Caccioli & J. Doyne Farmer & Nick Foti & Daniel Rockmore, 2013. "How interbank lending amplifies overlapping portfolio contagion: A case study of the Austrian banking network," Papers 1306.3704, arXiv.org.
  9. Teruyoshi Kobayashi & Kohei Hasui, 2013. "Efficient immunization strategies to prevent financial contagion," Papers 1308.0652, arXiv.org, revised Dec 2013.
  10. Papadimitriou, Theophilos & Gogas, Periklis & Tabak, Benjamin M., 2013. "Complex networks and banking systems supervision," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4429-4434.
  11. Giulia Iori & Rosario N. Mantegna & Luca Marotta & Salvatore Micciche' & James Porter & Michele Tumminello, 2014. "Networked relationships in the e-MID Interbank market: A trading model with memory," Papers 1403.3638, arXiv.org.
  12. Bargigli, Leonardo & Tedeschi, Gabriele, 2014. "Interaction in agent-based economics: A survey on the network approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 399(C), pages 1-15.
  13. Ruggero GRILLI & Gabriele TEDESCHI & Mauro GALLEGATI, 2012. "Markets connectivity and financial contagion," Working Papers 382, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

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