di Iasio, Giovanni and Battiston, Stefano and Infante, Luigi and Pierobon, Federico (2013): Capital and Contagion in Financial Networks.
Preview |
PDF
MPRA_paper_52141.pdf Download (1MB) | Preview |
Abstract
We implement a novel method to detect systemically important financial institutions in a network. The method consists in a simple model of distress and losses redistribution derived from the interaction of banks' balance-sheets through bilateral exposures. The algorithm goes beyond the traditional default-cascade mechanism, according to which contagion propagates only through banks that actually default. We argue that even in the absence of other defaults, distressed-but-non-defaulting institutions transmit the contagion through channels other than solvency: weakness in their balance sheet reduces the value of their liabilities, thereby negatively affecting their interbank lenders even before a credit event occurs. In this paper, we apply the methodology to a unique dataset covering bilateral exposures among all Italian banks in the period 2008-2012. We find that the systemic impact of individual banks has decreased over time since 2008. The result can be traced back to decreasing volumes in the interbank market and to an intense recapitalization process. We show that the marginal effect of a bank's capital on its contribution to systemic risk in the network is considerably larger when interconnectedness is high (good times): this finding supports the regulatory work on counter-cyclical (macroprudential) capital buffers.
Item Type: | MPRA Paper |
---|---|
Original Title: | Capital and Contagion in Financial Networks |
Language: | English |
Keywords: | Systemic risk; interbank market; contagion; network; feedback centrality. |
Subjects: | C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C45 - Neural Networks and Related Topics D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory G - Financial Economics > G0 - General > G01 - Financial Crises G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages |
Item ID: | 52141 |
Depositing User: | GIOVANNI DI IASIO |
Date Deposited: | 17 Dec 2013 06:23 |
Last Modified: | 28 Sep 2019 20:21 |
References: | Acemoglu, D., A. Ozdaglar, and A. Tahbaz-Salehi (2012). Systemic risk and stability in financial networks. Technical report, mimeo. Acharya, V. and O. Merrouche (2010). Precautionary hoarding of liquidity and interbank markets: Evidence from the sub-prime crisis. Technical report, National Bureau of Economic Research. Acharya, V., L. Pedersen, T. Philippon, and M. Richardson (2010). Measuring systemic risk. Available at SSRN 1595075 (10-02). Adrian, T. and M. Brunnermeier (2011). Covar. Technical report, National Bureau of Economic Research. Allen, F. and D. Gale (2000). Financial contagion. Journal of political economy 108(1), 1–33. Bargigli, L., G. Di Iasio, L. Infante, F. Lillo, and F. Pierobon (2013). The multiplex structure of interbank networks. arXiv preprint arXiv:1311.4798. Battiston, S., M. Puliga, R. Kaushik, P. Tasca, and G. Caldarelli (2012). Debtrank: Too central to fail? financial networks, the fed and systemic risk. Scientific Reports 2. Boss, M., M. Summer, and S. Thurner (2004). Contagion flow through banking networks. Computational Science-ICCS 2004, 1070–1077. Caballero, R. and A. Simsek (2009). Fire sales in a model of complexity. Technical report, National Bureau of Economic Research. Christensen, J., J. Lopez, and G. Rudebusch (2009). Do central bank liquidity facilities affect interbank lending rates? Federal Reserve Bank of San Francisco Working Paper 13. Cifuentes, R., G. Ferrucci, and H. Shin (2005). Liquidity risk and contagion. Journal of the European Economic Association 3(2-3), 556–566. Cont, R., A. Moussa, and E. Santos (2011). Network structure and systemic risk in banking systems. Available at SSRN 1733528. Drehmann, M. and N. Tarashev (2011). Measuring the systemic importance of interconnected banks. Elsinger, H., A. Lehar, and M. Summer (2003). Risk assessment for banking systems. In 14th Annual Utah Winter Finance Conference Paper; EFA 2003 Annual Conference Paper No. 437. Freixas, X., B. Parigi, and J. Rochet (2000). Systemic risk, interbank relations, and liquidity provision by the central bank. Journal of money, credit and banking, 611–638. Furfine, C. (2003). Interbank exposures: Quantifying the risk of contagion. Journal of Money, Credit and Banking, 111–128. Gai, P. and S. Kapadia (2010). Contagion in financial networks. Proceedings of the Royal Society A: Mathematical, Physical and Engineering Science 466 (2120), 2401–2423. Mistrulli, P. (2011). Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns. Journal of Banking & Finance 35(5), 1114–1127. Shleifer, A. and R. Vishny (2011). Fire sales in finance and macroeconomics. Journal of Economic Perspectives 25(1), 29–48. Stiglitz, J. (2010). Risk and global economic architecture: Why full financial integration may be undesirable. The American Economic Review 100(2), 388–392. Taylor, J. and J. Williams (2008). Further results on a black swan in the money market. Federal Reserve Bank of San Francisco, working paper. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/52141 |