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Monitoring Vulnerability and Impact Diffusion in Financial Networks

Author

Listed:
  • Thiago Christiano Silva
  • Sergio Rubens Stancato de Souza
  • Benjamin Miranda Tabak

Abstract

In this paper, we propose novel risk-related network measurements to identify the roles that financial institutions play as potential targets or sources of contagion. We derive theoretical properties and provide a clear systemic risk interpretation for the proposed measures. Devised upon the notion of communicability in networks, we introduce the impact susceptibility index, which indicates whether market participants are locally or remotely vulnerable. We show that this index can be used as a financial stability monitoring tool and apply it to analyze the Brazilian financial market. We find that non-banking institutions are potentially remote vulnerable in certain periods, while banking institutions are not susceptible to indirect impacts. To address the perspective of market participants as sources of contagion, we propose the impact diffusion influence index, which captures the potential influence of financial institutions on propagating impacts in the network. We unveil the presence of a portion of non-large banking institutions that is consistently more influential than large banks in potentially diffusing impacts throughout the network. Regarding financial system stability, regulators should identify the entities that play these two roles, as they can render the system more risky

Suggested Citation

  • Thiago Christiano Silva & Sergio Rubens Stancato de Souza & Benjamin Miranda Tabak, 2015. "Monitoring Vulnerability and Impact Diffusion in Financial Networks," Working Papers Series 392, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:392
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    File URL: https://www.bcb.gov.br/pec/wps/ingl/wps392.pdf
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    References listed on IDEAS

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    5. 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.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Guerra, Solange Maria & Silva, Thiago Christiano & Tabak, Benjamin Miranda & de Souza Penaloza, Rodrigo Andrés & de Castro Miranda, Rodrigo César, 2016. "Systemic risk measures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 442(C), pages 329-342.
    4. repec:eee:ememar:v:35:y:2018:i:c:p:164-189 is not listed on IDEAS
    5. Thiago Christiano Silva & Michel Alexandre da Silva & Benjamin Miranda Tabak, 2016. "Modeling Financial Networks: a feedback approach," Working Papers Series 438, Central Bank of Brazil, Research Department.
    6. repec:eee:phsmap:v:503:y:2018:i:c:p:650-674 is not listed on IDEAS
    7. 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.
    8. 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.
    9. João Barata Ribeiro Blanco Barroso & Thiago Christiano Silva & Sergio Rubens Stancato de Souza, 2016. "Decomposition of Systemic Risk Drivers in Evolving Financial Networks," Working Papers Series 448, Central Bank of Brazil, Research Department.
    10. 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.
    11. repec:eee:phsmap:v:506:y:2018:i:c:p:1016-1025 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. 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.
    14. repec:eee:finsta:v:38:y:2018:i:c:p:98-118 is not listed on IDEAS
    15. Pierre Guérin & Danilo Leiva-Leon, 2017. "Monetary policy, stock market and sectoral comovement," Working Papers 1731, Banco de España;Working Papers Homepage.

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