Systemic risk on different interbank network topologies

Simone Lenzu and Gabriele Tedeschi

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 18, 4331-4341

Abstract: In this paper we develop an interbank market with heterogeneous financial institutions that enter into lending agreements on different network structures. Credit relationships (links) evolve endogenously via a fitness mechanism based on agents’ performance. By changing the agent’s trust on its neighbor’s performance, interbank linkages self-organize themselves into very different network architectures, ranging from random to scale-free topologies. We study which network architecture can make the financial system more resilient to random attacks and how systemic risk spreads over the network. To perturb the system, we generate a random attack via a liquidity shock. The hit bank is not automatically eliminated, but its failure is endogenously driven by its incapacity to raise liquidity in the interbank network. Our analysis shows that a random financial network can be more resilient than a scale free one in case of agents’ heterogeneity.

Keywords: Interbank market; Dynamic network; Network resilience; Heterogeneity (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:18:p:4331-4341

DOI: 10.1016/j.physa.2012.03.035

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