Systemic losses in banking networks: indirect interaction of nodes via asset prices
AbstractA simple banking network model is proposed which features multiple waves of bank defaults and is analytically solvable in the limiting case of an infinitely large homogeneous network. The model is a collection of nodes representing individual banks; associated with each node is a balance sheet consisting of assets and liabilities. Initial node failures are triggered by external correlated shocks applied to the asset sides of the balance sheets. These defaults lead to further reductions in asset values of all nodes which in turn produce additional failures, and so on. This mechanism induces indirect interactions between the nodes and leads to a cascade of defaults. There are no interbank links, and therefore no direct interactions, between the nodes. The resulting probability distribution for the total (direct plus systemic) network loss can be viewed as a modification of the well-known Vasicek distribution.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1203.6778.
Date of creation: Mar 2012
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-10 (All new papers)
- NEP-BAN-2012-04-10 (Banking)
- NEP-NET-2012-04-10 (Network Economics)
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- Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008.
"Network models and financial stability,"
Bank of England working papers
346, Bank of England.
- Annika Birch & Tomaso Aste, 2014. "Systemic Losses Due to Counter Party Risk in a Stylized Banking System," Papers 1402.3688, arXiv.org.
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