How likely is contagion in financial networks?

Paul Glasserman and H. Peyton Young

Journal of Banking & Finance, 2015, vol. 50, issue C, 383-399

Abstract: Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses and defaults under a wide range of shock distributions. In contrast to most work on financial networks, we assume only minimal information about network structure and rely instead on information about the individual institutions that are the nodes of the network. The key node-level quantities are asset size, leverage, and a financial connectivity measure given by the fraction of a financial institution’s liabilities held by other financial institutions. We combine these measures to derive explicit bounds on the potential magnitude of network effects on contagion and loss amplification. Spillover effects are most significant when node sizes are heterogeneous and the originating node is highly leveraged and has high financial connectivity. Our results also highlight the importance of mechanisms that go beyond simple spillover effects to magnify shocks; these include bankruptcy costs, and mark-to-market losses resulting from credit quality deterioration or a loss of confidence. We illustrate the results with data on the European banking system.

Keywords: Systemic risk; Contagion; Financial network (search for similar items in EconPapers)
JEL-codes: D85 G21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (376)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426614000600
Full text for ScienceDirect subscribers only

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:eee:jbfina:v:50:y:2015:i:c:p:383-399

DOI: 10.1016/j.jbankfin.2014.02.006

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().