The effect of the interbank network structure on contagion and financial stability
In the wake of the financial crisis it has become clear that there is a need for macroprudential oversight in addition to the existing microprudential banking supervision. One of the lessons from the crisis is that the network structure of the banking system has to be taken into account to assess systemic risk. There exists, however, no analysis on the influence of the network topology on contagion in financial networks. This paper therefore compares contagion in Barabási-Albert (scale-free) with Watts-Strogatz (small-world) and random networks. A network model of banks, a firm- and household-sector as well as a central bank is used. Banks optimize a portfolio of risky investments and risk-free excess reserves according to their risk and liquidity preferences. They form a network via interbank loans and face a stochastic supply of household deposits. Contagion effects from the default of a large bank are studied in different network topologies. The results indicate that contagion is more severe in random and scale-free networks than in small-world networks. This situation changes when the central bank is not active in which case small-world networks are less stable than scale-free and random networks. It is also shown that interbank liquidity above a certain threshold leads to endogenous instability, regardless of the network topology. The results further indicate that network heterogeneity does not contribute to financial instability.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010.
"Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk,"
CEPR Discussion Papers
7762, C.E.P.R. Discussion Papers.
- Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," Working Paper Series 1126, European Central Bank.
- Heider, F. & Hoerova, M. & Holthausen, C., 2009. "Liquidity Hoarding and Interbank Market Spreads : The Role of Counterparty Risk," Discussion Paper 2009-40 S, Tilburg University, Center for Economic Research.
- Marie Hoerova & Cornelia Holthausen & Florian Heider, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," 2009 Meeting Papers 929, Society for Economic Dynamics.
- Galbiati, Marco & Soramaki, Kimmo, 2008.
"An agent-based model of payment systems,"
Bank of England working papers
352, Bank of England.
- Kavonius, Ilja Kristian & Castrén, Olli, 2009. "Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area," Working Paper Series 1124, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:hlj:hljwrp:12-2010. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Fahrholz)
If references are entirely missing, you can add them using this form.