IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v586y2022ics0378437121007615.html
   My bibliography  Save this article

Defense strategies against cascading failures in networks: “Too-big-to-fail” and “too-small-to-fail”

Author

Listed:
  • Kim, Minjung
  • Kim, Beom Jun

Abstract

“Too-big-to-fail (TBTF)” is a controversial approach to reducing the risk of cascading failures in the financial systems. In the TBTF defense strategy, most financial supports are provided to very big companies in order to avoid the complete breakdown of the entire system. We also consider “too-small-to-fail (TSTF)” as a comparative defense strategy, in which financial supports are more focused on small companies instead. We use two types of model network and a real network based on inter-industry Input-Output Table as underlying structures for cascading failures, and examine the validity of both defense strategies with two types of bailout policy, indirect (node capacity is increased) and direct (node load is decreased). We evaluate and compare the performances of TBTF and TSTF strategies in preventing cascading failures, and demonstrate that TSTF performs better when the node capacity is increased whereas TBTF works better when the node load is decreased.

Suggested Citation

  • Kim, Minjung & Kim, Beom Jun, 2022. "Defense strategies against cascading failures in networks: “Too-big-to-fail” and “too-small-to-fail”," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 586(C).
    • Handle: RePEc:eee:phsmap:v:586:y:2022:i:c:s0378437121007615
    DOI: 10.1016/j.physa.2021.126488
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437121007615
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2021.126488?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    2. Xuqing Huang & Irena Vodenska & Shlomo Havlin & H. Eugene Stanley, 2012. "Cascading Failures in Bi-partite Graphs: Model for Systemic Risk Propagation," Papers 1210.4973, arXiv.org, revised Jan 2013.
    3. M. E. J. Newman & D. J. Watts, 1999. "Renormalization Group Analysis of the Small-World Network Model," Working Papers 99-04-029, Santa Fe Institute.
    4. Co-Pierre Georg, 2010. "The effect of the interbank network structure on contagion and financial stability," Global Financial Markets Working Paper Series 12-2010, Friedrich-Schiller-University Jena.
    5. Cajueiro, Daniel O. & Tabak, Benjamin M., 2008. "The role of banks in the Brazilian interbank market: Does bank type matter?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(27), pages 6825-6836.
    6. Gao, Ya-Chun & Tang, Huai-Lin & Cai, Shi-Min & Gao, Jing-Jing & Stanley, H. Eugene, 2018. "The impact of margin trading on share price evolution: A cascading failure model investigation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 69-76.
    7. Wang, Jianwei & Rong, Lili & Zhang, Liang & Zhang, Zhongzhi, 2008. "Attack vulnerability of scale-free networks due to cascading failures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(26), pages 6671-6678.
    8. Wang, Jianwei, 2013. "Mitigation strategies on scale-free networks against cascading failures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2257-2264.
    9. Ya-Chun Gao & Huai-Lin Tang & Shi-Min Cai & Jing-Jing Gao & H. Eugene Stanley, 2018. "The impact of margin trading on share price evolution: A cascading failure model investigation," Papers 1804.07352, arXiv.org.
    10. Mark Anthony Johnson & Abdullah Mamun, 2012. "The failure of Lehman Brothers and its impact on other financial institutions," Applied Financial Economics, Taylor & Francis Journals, vol. 22(5), pages 375-385, March.
    11. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    12. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vandermarliere, Benjamin & Karas, Alexei & Ryckebusch, Jan & Schoors, Koen, 2015. "Beyond the power law: Uncovering stylized facts in interbank networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 428(C), pages 443-457.
    2. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    3. Xu, Tao & He, Jianmin & Li, Shouwei, 2016. "A dynamic network model for interbank market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 463(C), pages 131-138.
    4. Elosegui, Pedro & Forte, Federico D. & Montes-Rojas, Gabriel, 2022. "Network structure and fragmentation of the Argentinean interbank markets," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(3).
    5. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    6. repec:zbw:bofrdp:2013_019 is not listed on IDEAS
    7. Andrey Sokolov & Rachel Webster & Andrew Melatos & Tien Kieu, 2012. "Loan and nonloan flows in the Australian interbank network," Papers 1202.3182, arXiv.org.
    8. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
    9. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    10. Caballero, Julián, 2012. "Banking Crises and Financial Integration," IDB Publications (Working Papers) 4198, Inter-American Development Bank.
    11. Dror Y. Kenett & Sary Levy-Carciente & Adam Avakian & H. Eugene Stanley & Shlomo Havlin, 2015. "Dynamical Macroprudential Stress Testing Using Network Theory," Working Papers 15-12, Office of Financial Research, US Department of the Treasury.
    12. Sokolov, Andrey & Webster, Rachel & Melatos, Andrew & Kieu, Tien, 2012. "Loan and nonloan flows in the Australian interbank network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(9), pages 2867-2882.
    13. Adão, Luiz F.S. & Silveira, Douglas & Ely, Regis A. & Cajueiro, Daniel O., 2022. "The impacts of interest rates on banks’ loan portfolio risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    14. Dror Kenett & Shlomo Havlin, 2015. "Network science: a useful tool in economics and finance," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 14(2), pages 155-167, November.
    15. Levy-Carciente, Sary & Kenett, Dror Y. & Avakian, Adam & Stanley, H. Eugene & Havlin, Shlomo, 2015. "Dynamical macroprudential stress testing using network theory," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 164-181.
    16. Song, Jae Wook & Ko, Bonggyun & Cho, Poongjin & Chang, Woojin, 2016. "Time-varying causal network of the Korean financial system based on firm-specific risk premiums," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 287-302.
    17. Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 583-608.
    18. He, Fang & Chen, Xi, 2016. "Credit networks and systemic risk of Chinese local financing platforms: Too central or too big to fail?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 158-170.
    19. Huang, Wei-Qiang & Zhuang, Xin-Tian & Yao, Shuang & Uryasev, Stan, 2016. "A financial network perspective of financial institutions’ systemic risk contributions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 456(C), pages 183-196.
    20. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
    21. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:586:y:2022:i:c:s0378437121007615. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.