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A network model of financial system resilience

Author

Listed:
  • Anand, Kartik

    () (Technische Universitat Berlin)

  • Gai, Prasanna

    () (Department of Economics, University of Auckland and National University of Singapore, Risk Management Institute)

  • Kapadia, Sujit

    () (Bank of England)

  • Brennan, Simon

    () (Bank of England)

  • Willison, Matthew

    () (Bank of England)

Abstract

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylised financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminary model generates broadly sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyse how our results are influenced by fire-sale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Suggested Citation

  • Anand, Kartik & Gai, Prasanna & Kapadia, Sujit & Brennan, Simon & Willison, Matthew, 2012. "A network model of financial system resilience," Bank of England working papers 458, Bank of England.
  • Handle: RePEc:boe:boeewp:0458
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Contagion; financial crises; network models; systemic risk;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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