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Evaluating systemic risk using bank default probabilities in financial networks

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  • Souza, Sergio Rubens Stancato de
  • Silva, Thiago Christiano
  • Tabak, Benjamin Miranda
  • Guerra, Solange Maria

Abstract

In this paper, we propose a novel methodology to measure systemic risk in networks composed of financial institutions. Our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with the default probabilities of institutions. We also present new heuristics for designing feasible and relevant stress-testing scenarios that can subside regulators in financial system surveillance tasks. We develop a methodology to extract banking communities and show that these communities have a relevant effect on systemic risk. We find that these communities are mostly composed of non-large banks, suggesting that regulators should also broaden their surveillance efforts to these banking communities other than to the usual SIFIs and large banks. Finally, our results provide insights and guidelines for policymakers.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:dyncon:v:66:y:2016:i:c:p:54-75
    DOI: 10.1016/j.jedc.2016.03.003
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    Citations

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    Cited by:

    1. repec:eee:phsmap:v:503:y:2018:i:c:p:650-674 is not listed on IDEAS
    2. Thiago Christiano Silva & Sergio Rubens Stancato de Souza & Benjamin Miranda Tabak, 2016. "Structure and Dynamics of the Global Financial Network," Working Papers Series 439, Central Bank of Brazil, Research Department.
    3. repec:eee:ecofin:v:43:y:2018:i:c:p:141-157 is not listed on IDEAS
    4. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Cajueiro, Daniel Oliveira & Dias, Marina Villas Boas, 2018. "Adequacy of deterministic and parametric frontiers to analyze the efficiency of Indian commercial banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 1016-1025.
    5. Stefan Avdjiev & Paolo Giudici & Alessandro Spelta, 2019. "Measuring contagion risk in international banking," BIS Working Papers 796, Bank for International Settlements.
    6. repec:eee:finsta:v:38:y:2018:i:c:p:98-118 is not listed on IDEAS
    7. Silva, Thiago Christiano & da Silva, Michel Alexandre & Tabak, Benjamin Miranda, 2017. "Systemic risk in financial systems: A feedback approach," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 97-120.
    8. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Guerra, Solange Maria, 2017. "Why do vulnerability cycles matter in financial networks?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 592-606.
    9. repec:gam:jrisks:v:6:y:2018:i:4:p:137-:d:187763 is not listed on IDEAS
    10. Gabriele Visentin & Stefano Battiston & Marco D'Errico, 2016. "Rethinking Financial Contagion," Papers 1608.07831, arXiv.org.
    11. repec:eee:ecmode:v:64:y:2017:i:c:p:589-600 is not listed on IDEAS
    12. Thiago Christiano Silva & Solange Maria Guerra & Benjamin Miranda Tabak, 2019. "Fiscal Risk and Financial Fragility," Working Papers Series 495, Central Bank of Brazil, Research Department.
    13. repec:eee:finlet:v:27:y:2018:i:c:p:105-112 is not listed on IDEAS
    14. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Cajueiro, Daniel Oliveira & Dias, Marina Villas Boas, 2017. "A comparison of DEA and SFA using micro- and macro-level perspectives: Efficiency of Chinese local banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 216-223.
    15. Thiago Christiano Silva & Solange Maria Guerra & Michel Alexandre da Silva & Benjamin Miranda Tabak, 2018. "Interconnectedness, Firm Resilience and Monetary Policy," Working Papers Series 478, Central Bank of Brazil, Research Department.
    16. Casarin, Roberto & Costola, Michele & Yenerdag, Erdem, 2018. "Financial bridges and network communities," SAFE Working Paper Series 208, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    17. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

    More about this item

    Keywords

    Systemic risk; Financial stability; Interbank market; Stress test; Macroprudential; Network;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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