Developing a Financial Stability Network Model: The Macroprudential Two-Mode Network (M2MN) toolbox

This paper introduces the Macroprudential Two-Mode Network Analysis Toolbox (M2MN), a modular framework designed to assess credit risk shocks and contagion through overlapping exposures in banking systems. The M2MN toolbox uses a weighted two-mode network structure linking banks to grouped credit exposures, capturing indirect interconnectedness and systemic vulnerabilities arising from portfolio overlaps. The framework comprises three integrated modules: (i) a network diagnostics module that computes exposure-based metrics and community structures; (ii) a first-round sensitivity analysis simulating credit losses and capital impacts under CRR2 regulatory thresholds; and (iii) a second-round effects module. The toolbox is applied to supervisory data for 31 Portuguese banks, with calibrated scenarios targeting key exposures. Results show that most losses are absorbed by voluntary capital buffers, with limited contagion under conservative stress assumptions, reflecting the strong capitalization of the system. The M2MN toolbox provides a flexible and empirically grounded platform for systemic risk monitoring, buffer calibration, and supervisory scenario design, contributing to the refinement of macroprudential tools within the regulatory framework.