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Systemic risk in the interbank market with overlapping portfolios and cross-ownership of the subordinated debts

Shanshan Jiang and Hong Fan

Physica A: Statistical Mechanics and its Applications, 2021, vol. 562, issue C

Abstract: In the banking network system, systemic risk affected by many factors. The cross-ownership of the subordinated debts is regarded as the accelerator of the spread of the systemic risk. In view of the systemic risk of banking network systems, considered interbank lending, overlapping portfolios, and cross-ownership of the subordinated debts, a multi-channel systemic risk contagion network model is proposed. In addition, in order to reflect the operation process of the banking network system more truly, the model introduces investment risk and allows banks to compensate for liquidity by depreciating assets. Based on the proposed model, the effects of deposit, investment, cross-ownership of the subordinated debts, and deposit reserve rate on risk contagion are studied and analyzed quantitatively. The proposed model indicates that cross-ownership of the subordinated debts is helpful to the stability of the banking network system when the banking network system suffered a small shock, but once the banking network system suffered a big shock, cross-ownership of the subordinated debts becomes the booster of risk transmission in the banking network system, which is liable to lead to the Domino effect of bankruptcy. This study provides a scheme for quantitative research on the systemic risk of the banking network system, which can be calibrated to real data. It also provides a reference for policy makers and regulatory authorities to guard against systemic risk of banking network systems.

Keywords: Complex network; Credit risk; Interbank market; Overlapping portfolios; Asset correlation (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:562:y:2021:i:c:s0378437120307135

DOI: 10.1016/j.physa.2020.125355

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Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

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