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Recreating Banking Networks under Decreasing Fixed Costs

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Listed:
  • Ben R. Craig
  • Dietmar Maringer
  • Sandra Paterlini

Abstract

Theory emphasizes the central role of the structure of networks in the behavior of financial systems and their response to policy. Real-world networks, however, are rarely directly observable: Banks? assets and liabilities are typically known, but not who is lending how much and to whom. We first show how to simulate realistic networks that are based on balance-sheet information by minimizing costs where there is a fixed cost to forming a link. Second, we also show how to do this for a model with fixed costs that are decreasing in the number of links. To approach the optimization problem, we develop a new algorithm based on the transportation planning literature. Computational experiments find that the resulting networks are not only consistent with the balance sheets, but also resemble real-world financial networks in their density (which is sparse but not minimally dense) and in their core-periphery and disassortative structure.

Suggested Citation

  • Ben R. Craig & Dietmar Maringer & Sandra Paterlini, 2019. "Recreating Banking Networks under Decreasing Fixed Costs," Working Papers 201921, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:192100
    DOI: 10.26509/frbc-wp-201921
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    File URL: https://doi.org/10.26509/frbc-wp-201921
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    References listed on IDEAS

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    More about this item

    Keywords

    banking networks; network models; optimization;

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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