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Systemic risk in banking networks: Advantages of “tiered” banking systems

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  • Teteryatnikova, Mariya

Abstract

This paper studies the risk and potential impact of system-wide defaults in a tiered banking network, where a small group of head institutions has many credit linkages with other banks, while the majority of banks have only a few links. A network is random and displays a given distribution of the number of banks׳ linkages, known as degree. We model tiering by a negative correlation between degrees of neighboring banks and by a scale-free degree distribution. The main findings of the paper highlight the advantages of tiering. Both the risk of systemic crisis and the potential scope of the crisis are lower in systems with negative correlation of bank degrees than in other types of systems. Similarly, in scale-free networks, the resilience of the system to shocks is increasing with the level of tiering.

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  • Teteryatnikova, Mariya, 2014. "Systemic risk in banking networks: Advantages of “tiered” banking systems," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 186-210.
  • Handle: RePEc:eee:dyncon:v:47:y:2014:i:c:p:186-210
    DOI: 10.1016/j.jedc.2014.08.007
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    Cited by:

    1. Souza, Sergio Rubens Stancato de & Silva, Thiago Christiano & Tabak, Benjamin Miranda & Guerra, Solange Maria, 2016. "Evaluating systemic risk using bank default probabilities in financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 66(C), pages 54-75.
    2. repec:spr:jeicoo:v:13:y:2018:i:2:d:10.1007_s11403-016-0182-z is not listed on IDEAS
    3. repec:spr:annopr:v:254:y:2017:i:1:d:10.1007_s10479-017-2401-y is not listed on IDEAS
    4. Yuri Biondi & Feng Zhou, 2019. "Interbank credit and the money manufacturing process: a systemic perspective on financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 437-468, September.

    More about this item

    Keywords

    Banking crisis; Contagion; Default; Random network; Disassortative network; Scale-free distribution;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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