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Filling in the blanks: Network structure and interbank contagion

Kartik Anand, Ben Craig and Goetz von Peter (goetz.von.peter@bis.org)

No 02/2014, Discussion Papers from Deutsche Bundesbank

Abstract: The pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unknown, and maximum entropy serves as the leading method for estimating unobserved counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, leading to networks with minimum density. When used in a stress testing context, the minimum density approach performs better than maximum entropy and also permits more robust analysis. Using the two benchmarks side by side helps identify a range of possible systemic risk outcomes when the true pattern of counterparty exposures is unknown.

Keywords: interbank markets; networks; entropy; intermediation; systemic risk (search for similar items in EconPapers)
JEL-codes: C63 D85 G21 L14 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-net
References: Add references at CitEc
Citations: View citations in EconPapers (27)

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Related works:
Journal Article: Filling in the blanks: network structure and interbank contagion (2015) Downloads
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014) Downloads
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014) Downloads
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014) Downloads
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