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Filling in the Blanks: Network Structure and Interbank Contagion

Kartik Anand, Ben Craig () and Goetz von Peter ()

Staff Working Papers from Bank of Canada

Abstract: The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side by side defines a useful range that bounds the cost of systemic stress present in the true interbank network when counterparty exposures are unknown.

Keywords: Econometric and statistical methods; Financial Institutions; Financial stability (search for similar items in EconPapers)
JEL-codes: C13 C14 C21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-net
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https://www.bankofcanada.ca/wp-content/uploads/2014/06/wp2014-26.pdf

Related works:
Journal Article: Filling in the blanks: network structure and interbank contagion (2015) Downloads
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014) Downloads
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014) Downloads
Working Paper: Filling in the blanks: Network structure and interbank contagion (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:14-26

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