BALANCE SHEET ANALYSIS OF CREDIT AND DEBT NETWORKS

Paulo Garrido (), Pedro Campos () and André Dias
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Paulo Garrido: Escola de Engenharia, Universidade do Minho, 4800 Guimar aes, Portugal
Pedro Campos: LIAAD INESC TEC and Faculdade de Economia, Universidade do Porto, Rua Dr. Roberto Frias, 4200-465 Porto, Portugal
André Dias: LIAAD INESC TEC and Faculdade de Economia, Universidade do Porto, Rua Dr. Roberto Frias, 4200-465 Porto, Portugal

Advances in Complex Systems (ACS), 2015, vol. 18, issue 05n06, 1-18

Abstract: In this paper, we present a computing procedure to analyze a network of credit and debt among agents (nodes) from a standpoint of balance sheet dependencies. The aim is to develop a method to assess thoroughly the sensitivity of the network to potential individual insolvencies. For this purpose, given a state of the network, the insolvency of an agent is assumed and the cascade of provoked insolvencies is simulated. Exploring the matrix definition of the network, this is made systematically for all agents. Therefore, in only one run of the procedure, all the possible trajectories of insolvencies, each beginning in a different agent, are calculated. This allows spotting at a glance which agents are “systemically riskier”. Determination of adequate capital levels can be made on a case basis by running the procedure repeatedly. This work contributes with two new aspects to the existing literature. First, given a known situation of a credit and debt network, a computing procedure is presented that allows to assess the network sensitivity to the exogenous insolvency of any of its nodes. Second, continued monitoring of a credit and debt network is computationally feasible. This “proof of concept” software can be extended into a tool useful for research and regulation, if the relevant information is made available.

Keywords: Credit and debt networks; balance sheet insolvency; insolvency propagation; banking networks; systemic risk; financial crisis; Julia programming (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S0219525915500253

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