Defuse the Bomb: Rewiring Interbank Networks

Matteo Chinazzi, Stefano Pegoraro and Giorgio Fagiolo ()

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: In this paper we contribute to the debate on macro-prudential regulation by assessing which structure of the nancial system is more resilient to exogenous shocks, and which conditions, in terms of balance sheet compositions, capital requirements and asset prices, guarantee the higher degree of stability. We use techniques drawn from the theory of complex networks to show how contagion can propagate under dierent scenarios when the topology of the nancial system, the characteristics of the nancial institutions, and the regulations on capital are let vary. First, we benchmark our results using a simple model of contagion as the one that has been popularized by Gai and Kapadia (2010). Then, we provide a richer model in which both short- and long-term interbank markets exist. By doing so, we study how liquidity shocks (de)stabilize the system under dierent market conditions. Our results demonstrate how connectivity, the topology of the markets and the characteristics of the nancial institutions interact in determining the stability of the system.

Keywords: financial networks; systemic risk; contagion; regulation; network topology (search for similar items in EconPapers)
Date: 2015-03-06
New Economics Papers: this item is included in nep-ban, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2015/16

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