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Complex Networks and Banking Systems Supervision

  • Theophilos Papadimitriou
  • Periklis Gogas
  • Benjamin M. Tabak

Comprehensive and thorough supervision of all banking institutions under a Central Bank’s regulatory control has become necessary as recent banking crises show. Promptly identifying bank distress and contagion issues is of great importance to the regulators. This paper proposes a methodology that can be used additionally to the standard methods of bank supervision or the new ones proposed to be implemented. By this, one can reveal the degree of banks’ connectedness and thus identify “core” instead of just “big” banks. Core banks are central in the network in the sense that they are shown to be crucial for network supervision. Core banks can be used as gauges of bank distress over a sub-network and promptly raise a red flag so that the central bank can effectively and swiftly focus on the corresponding neighborhood of financial institutions. In this paper we demonstrated the proposed scheme using as an example the asset returns variable. The method may and should be used with alternative variables as well.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps306.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 306.

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Date of creation: May 2013
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Handle: RePEc:bcb:wpaper:306
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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