THE IMPACT OF BANK ACTIVITIES ON CONTAGION RISK IN INTERBANK NETWORKS

Shouwei Li () and Jianmin He
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Shouwei Li: School of Economics and Management, Southeast University, Nanjing, Jiangsu 211189, P. R. China
Jianmin He: School of Economics and Management, Southeast University, Nanjing, Jiangsu 211189, P. R. China

Advances in Complex Systems (ACS), 2012, vol. 15, issue supp0, 1-20

Abstract: In this paper, we investigate how contagion risk is affected by bank activities in four types of interbank network structures, that is, random, small-world, scale-free and tiered networks. We vary the key parameters that define bank activities in the interbank market — including the size of interbank exposures, the size of liquid assets, the heterogeneity of the size of credit lending and the heterogeneity of banks — and analyze the impact of these parameters on contagion risk. First, we find that the size of interbank exposures is the main factor in determining the effect of contagion risk, that increases in the size of interbank exposures may lead to an increase in the threat of contagion risk, that after the size of interbank exposures rises beyond a threshold, the effect of contagion risk in small-world networks is the most significant, followed by that in tiered, random and scale-free networks, respectively. Second, increases in the size of liquid assets can decrease the effect of contagion risk. Third, the impact of the heterogeneity of the size of credit lending on contagion risk varies with interbank network structures. Finally, the effect of contagion risk among heterogeneous banks is stronger than that among homogeneous banks, and there is a positive relationship between the effect of contagion risk and the heterogeneity of banks.

Keywords: Interbank market; contagion risk; network structure; bank activities (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S0219525912500865

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