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A Network model of systemic risk: identifying the sources of dependence across institutions

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  • Carlos Castro
  • Juan Sebastian Ordonez

Abstract

We design a financial network model that explicitly incorporates linkages across institutions through a direct contagion channel, as well as an indirect common exposure channel. In particular, common exposure is setup so as to link the fi nancial to the real sector. The model is calibrated to balance sheet data on the colombian fi nancial sector. Results indicate that commercial banks are the most systemically important financial institutions in the system. Whereas government owned institutions are the most vulnerable institutions in the system.

Suggested Citation

  • Carlos Castro & Juan Sebastian Ordonez, 2012. "A Network model of systemic risk: identifying the sources of dependence across institutions," Documentos de Trabajo 9651, Universidad del Rosario.
    • Handle: RePEc:col:000092:009651
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    File URL: http://repository.urosario.edu.co/bitstream/handle/10336/11284/9651.pdf
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    References listed on IDEAS

    as
    1. Edson Bastos Santos & Rama Cont, 2010. "The Brazilian Interbank Network Structure and Systemic Risk," Working Papers Series 219, Central Bank of Brazil, Research Department.
    2. Carlos Castro Iragorri & Stijn Ferrari, 2010. "Measuring the systemic importance of financial institutions using market information," Financial Stability Review, National Bank of Belgium, vol. 8(1), pages 127-141, June.
    3. Carlos León & Clara Machado & Freddy cepeda & Miguel Sarmiento, 2011. "Too-connected-to-fail Institutions and Payments System´s Stability: Assessing Challenges for Financial Authorities," Borradores de Economia 8155, Banco de la Republica.
    4. Mr. Jorge A Chan-Lau, 2010. "Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal," IMF Working Papers 2010/098, International Monetary Fund.
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    7. Mr. Jorge A Chan-Lau, 2010. "Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems," IMF Working Papers 2010/107, International Monetary Fund.
    8. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    9. Becher, Christopher & Millard, Stephen & SoramÃÂäki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
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    11. Clara Lia Machado & Carlos León & Miguel Sarmiento & Orlando Chipatecua, 2010. "Riesgo Sistémico y Estabilidad del Sistema de Pagos de Alto Valor en Colombia: Análisis bajo Topología de Redes y Simulación de Pagos," Borradores de Economia 7669, Banco de la Republica.
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    More about this item

    Keywords

    systemic risk; network models; contagion; common exposure;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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