A network model of financial system resilience

Kartik Anand, Prasanna Gai (), Sujit Kapadia, Simon Brennan () and Matthew Willison
Additional contact information
Prasanna Gai: Department of Economics, University of Auckland and National University of Singapore, Risk Management Institute
Simon Brennan: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 458, Bank of England working papers from Bank of England

Abstract: We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylised financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminary model generates broadly sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyse how our results are influenced by fire-sale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Keywords: Contagion; financial crises; network models; systemic risk (search for similar items in EconPapers)
JEL-codes: C63 G10 G17 G21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-07-20
New Economics Papers: this item is included in nep-ban, nep-net, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: A network model of financial system resilience (2013)
Working Paper: A network model of financial system resilience (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0458

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