The Formation of Financial Networks

Ana Babus

No 2007.69, Working Papers from Fondazione Eni Enrico Mattei

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 Stability; Network Formation; Contagion Risk (search for similar items in EconPapers)
JEL-codes: C70 G21 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-gth and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

Downloads: (external link)
https://feem-media.s3.eu-central-1.amazonaws.com/w ... oads/NDL2007-069.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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2007.69

Access Statistics for this paper

More papers in Working Papers from Fondazione Eni Enrico Mattei Contact information at EDIRC.
Bibliographic data for series maintained by Alberto Prina Cerai ( this e-mail address is bad, please contact ).