The dynamics of financial stability in complex networks
AbstractWe address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking regulation, the so called Merton-Vasicek model. Economic agents are attracted to each other to exchange `economic energy', forming a network of trades. When the capital level of one economic agent drops below a minimum, the economic agent becomes insolvent. The insolvency of one single economic agent affects the economic energy of all its neighbours which thus become susceptible to insolvency, being able to trigger a chain of insolvencies (avalanche). We show that the distribution of avalanche sizes follows a power-law whose exponent depends on the minimum capital level. Furthermore, we present evidence that under an increase in the minimum capital level, large crashes will be avoided only if one assumes that agents will accept a drop in business levels, while keeping their trading attitudes and policies unchanged. The alternative assumption, that agents will try to restore their business levels, may lead to the unexpected consequence that large crises occur with higher probability.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1103.0717.
Date of creation: Mar 2011
Date of revision: Jan 2013
Publication status: Published in Eur. Phys. J. B (2012) 85: 256
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-12 (All new papers)
- NEP-BAN-2011-03-12 (Banking)
- NEP-RMG-2011-03-12 (Risk Management)
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- Roberto Piazza, 2010. "Growth and Crisis, Unavoidable Connection?," IMF Working Papers 10/267, International Monetary Fund.
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