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Completeness, interconnectedness and distribution of interbank exposures: A parameterized analysis of the stability of financial networks

Angelika Sachs

No 2010,08, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: This paper assesses the impact of a certain structure of interbank exposures on the stability of a stylized financial system. Given a certain balance sheet structure of financial institutions, a large number of valid matrices of interbank exposures is created by a random generator. Assuming a certain loss given default, domino effects are simulated. The main results are, first, that financial stability depends not only on the completeness and interconnectedness of the network but also on the distribution of interbank exposures within the system (measured by entropy). Second, looking at random graphs, the sign of the correlation between the degree of equality of the distribution of claims and financial stability depends on the connectivity of the financial system as well as on additional parameters that affect the vulnerability of the system to interbank contagion. Third, the more concentrated assets are within a money center model, the less stable it is. Fourth, a money center model with asset concentration among core banks is less stable than a random graph with banks of homogeneous size. Results obtained in this paper extend existing theoretical literature that exclusively focuses on completeness and interconnectedness of the network as well as empirical literature that exclusively focuses on one particular financial network.

Keywords: domino effects; interbank lending; financial stability; contagion (search for similar items in EconPapers)
JEL-codes: C63 G21 G28 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-net and nep-rmg
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Citations: View citations in EconPapers (18)

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