Filling in the Blanks: Network Structure and Interbank Contagion

Kartik Anand, Ben Craig and Goetz von Peter ()

No 1416, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

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 contagion in the true interbank network when counterparty exposures are unknown.

Keywords: Interbank markets; networks; entropy; intermediation; systemic risk (search for similar items in EconPapers)
JEL-codes: C63 D85 G21 L14 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014-10-02
New Economics Papers: this item is included in nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-201416 Persistent link
https://www.clevelandfed.org/-/media/project/cleve ... nk-contagion-pdf.pdf Full text (application/pdf)

Related works:
Journal Article: Filling in the blanks: network structure and interbank contagion (2015)
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014)
Working Paper: Filling in the Blanks: Network Structure and Interbank Contagion (2014)
Working Paper: Filling in the blanks: Network structure and interbank contagion (2014)
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:fip:fedcwp:1416

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-201416

Access Statistics for this paper

More papers in Working Papers (Old Series) from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().