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Systemic risk on different interbank network topologies

Listed author(s):
  • Simone LENZU

    ()

    (Kellogg Business School, Northwestern University, Evanston Illinois)

  • Gabriele TEDESCHI

    ()

    (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

In this paper we develop an interbank market with heterogeneous financial institutions that enter into lending agreements on different network structures. Credit relationships (links) evolves endogenously via a fitness mechanism based on agents performance. By changing the agent's trust on its neighbor's performance, interbank linkages self-organize themselves into very different network architectures, ranging from random to scale-free topologies. We study which network architecture can make the financial system more resilient to random attacks and how systemic risk spreads over the network. To perturb the system, we generate a random attack via a liquidity shock. The hit bank is not automatically eliminated, but its failure is endogenously driven by its incapacity to raise liquidity in the interbank network. Our analysis shows that a random financial network can be more resilient than a scale free one in case of agents' heterogeneity.

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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 375.

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Length: 23
Date of creation: Apr 2012
Handle: RePEc:anc:wpaper:375
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