The Formation of Financial Networks

Ana Babus

No 06-093/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. The trade-off between the gains and the risks of being connected shapes banks ’incentives to form links. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.

Keywords: financial stability; network formation; contagion risk (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Date: 2006-10-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The formation of financial networks (2016)
Working Paper: The Formation of Financial Networks (2007)
Working Paper: The Formation of Financial Networks (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20060093

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