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Network structure and systemic risk in banking systems

Rama Cont (), Amal Moussa and Edson B Santos
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Rama Cont: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique
Amal Moussa: Department of Statistics - Columbia University [New York]

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Abstract: We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index. We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution's contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining its systemic importance. These observations plead for capital requirements which depend on exposures, rather than aggregate balance sheet size, and which target systemically important institutions.

Date: 2013-07-01
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Published in JP Fouque & J Langsam. Handbook of Systemic Risk, Cambridge Univ Press, pp.327-368, 2013, 9781107023437

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