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The impact of network inhomogeneities on contagion and system stability

Author

Listed:
  • Arnd Hübsch

    () (d-fine GmbH)

  • Ursula Walther

    () (Berlin School of Economics and Law)

Abstract

Abstract This work extends the contagion model introduced by Nier et al. (J Econ Dyn Control 31(6):2033–2060, 2007. http://www.bankofengland.co.uk/publications/workingpapers/wp346.pdf ) to inhomogeneous networks. We preserve the convenient description of a financial system using a sparsely parameterized random graph, but add several relevant inhomogeneities. These include well-connected banks, financial institutions with disproportionately large interbank assets, and big banks that focus on wholesale and retail customers. These extensions significantly enhance the model’s generality as they reflect realistic inhomogeneities that have a potentially decisive impact on a system’s stability. We find that large and well-connected banks have a surprisingly modest impact. However, institutions with disproportionately large interbank assets significantly increase the risk of contagion in networks. Moreover, these effects can be partly compensated by a redistribution of equity capital, even without increasing the total amount. However, the level of regulatory capital should be defined according to the interbank market position of a bank, and not the size of the bank.

Suggested Citation

  • Arnd Hübsch & Ursula Walther, 2017. "The impact of network inhomogeneities on contagion and system stability," Annals of Operations Research, Springer, vol. 254(1), pages 61-87, July.
  • Handle: RePEc:spr:annopr:v:254:y:2017:i:1:d:10.1007_s10479-017-2401-y
    DOI: 10.1007/s10479-017-2401-y
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    References listed on IDEAS

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    1. repec:eee:ejores:v:270:y:2018:i:1:p:51-65 is not listed on IDEAS
    2. Roy Cerqueti & Gian Paolo Clemente & Rosanna Grassi, 2018. "Systemic risk assessment through high order clustering coefficient," Papers 1810.13250, arXiv.org.

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