Algorithm for identifying systemically important banks in payment systems

Kimmo Soramäki () and Samantha Cook

No 2012-43, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The ability to accurately estimate the extent to which the failure of a bank disrupts the financial system is very valuable for regulators of the financial system. One important part of the financial system is the interbank payment system. This paper develops a robust measure, SinkRank, that accurately predicts the magnitude of disruption caused by the failure of a bank in a payment system and identifies banks most affected by the failure. SinkRank is based on absorbing Markov chains, which are well-suited to model liquidity dynamics in payment systems. Because actual bank failures are rare and the data is not generally publicly available, the authors test the metric by simulating payment networks and inducing failures in them. The authors use two metrics to evaluate the magnitude of the disruption: the duration of delays in the system (Congestion) aggregated over all banks and the average reduction in available funds of the other banks due to the failing bank (Liquidity dislocation). The authors test SinkRank on Barabasi-Albert types of scale-free networks modeled on the Fedwire system and find that the failing bank's SinkRank is highly correlated with the resulting disruption in the system overall; moreover, the SinkRank technology can identify which individual banks would be most disrupted by a given failure.

Keywords: Systemic risk; interbank payment system; liquidity; Markov chains; simulation (search for similar items in EconPapers)
JEL-codes: C63 E58 G28 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.economics-ejournal.org/economics/discussionpapers/2012-43
https://www.econstor.eu/bitstream/10419/62120/1/723776571.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201243

Access Statistics for this paper

More papers in Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().