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Completeness, interconnectedness and distribution of interbank exposures: A parameterized analysis of the stability of financial networks

  • Sachs, Angelika
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    This paper assesses the impact of a certain structure of interbank exposures on the stability of a stylized financial system. Given a certain balance sheet structure of financial institutions, a large number of valid matrices of interbank exposures is created by a random generator. Assuming a certain loss given default, domino effects are simulated. The main results are, first, that financial stability depends not only on the completeness and interconnectedness of the network but also on the distribution of interbank exposures within the system (measured by entropy). Second, looking at random graphs, the sign of the correlation between the degree of equality of the distribution of claims and financial stability depends on the connectivity of the financial system as well as on additional parameters that affect the vulnerability of the system to interbank contagion. Third, the more concentrated assets are within a money center model, the less stable it is. Fourth, a money center model with asset concentration among core banks is less stable than a random graph with banks of homogeneous size. Results obtained in this paper extend existing theoretical literature that exclusively focuses on completeness and interconnectedness of the network as well as empirical literature that exclusively focuses on one particular financial network.

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    File URL: http://econstor.eu/bitstream/10419/41456/1/638117666.pdf
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    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2010,08.

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    Date of creation: 2010
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    Handle: RePEc:zbw:bubdp2:201008
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    1. Iori, G. & Masi, G. D. & Precup, O. V. & Gabbi, G. & Caldarelli, G., 2005. "A network analysis of the Italian oversight money market," Working Papers 05/05, Department of Economics, City University London.
    2. Juan Sole & Marco A Espinosa-Vega, 2010. "Cross-Border Financial Surveillance: A Network Perspective," IMF Working Papers 10/105, International Monetary Fund.
    3. Iman van Lelyveld & Franka Liedorp, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    4. Jorge A. Chan-Lau, 2010. "Balance Sheet Network Analysis of too-Connected-To-Fail Risk in Global and Domestic Banking Systems," IMF Working Papers 10/107, International Monetary Fund.
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