Recreating Banking Networks under Decreasing Fixed Costs
Ben Craig (),
Dietmar Maringer and
No 201921, Working Papers from Federal Reserve Bank of Cleveland
Theory emphasizes the central role of the structure of networks in the behavior of financial systems and their response to policy. Real-world networks, however, are rarely directly observable: Banks? assets and liabilities are typically known, but not who is lending how much and to whom. We first show how to simulate realistic networks that are based on balance-sheet information by minimizing costs where there is a fixed cost to forming a link. Second, we also show how to do this for a model with fixed costs that are decreasing in the number of links. To approach the optimization problem, we develop a new algorithm based on the transportation planning literature. Computational experiments find that the resulting networks are not only consistent with the balance sheets, but also resemble real-world financial networks in their density (which is sparse but not minimally dense) and in their core-periphery and disassortative structure.
Keywords: banking networks; network models; optimization (search for similar items in EconPapers)
JEL-codes: C44 E59 G21 (search for similar items in EconPapers)
Pages: 30 pages
New Economics Papers: this item is included in nep-cmp
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