The Formation of Financial Networks

Ana Babus

No 9100, Coalition Theory Network Working Papers from Fondazione Eni Enrico Mattei (FEEM)

Abstract: Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. Banks form links order to reduce the risk of contagion. The network is formed endogenously and serves as an insurance mechanism. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 32
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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https://ageconsearch.umn.edu/record/9100/files/wp070069.pdf (application/pdf)

Related works:
Journal Article: The formation of financial networks (2016)
Working Paper: The Formation of Financial Networks (2007)
Working Paper: The Formation of Financial Networks (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemct:9100

DOI: 10.22004/ag.econ.9100

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