Book contents
- Frontmatter
- Contents
- Contributors
- Introduction
- PART I DATA: THE PREREQUISITE FOR MANAGING SYSTEMIC RISK
- PART II STATISTICS AND SYSTEMIC RISK
- PART III MEASURING AND REGULATING SYSTEMIC RISK
- PART IV NETWORKS
- 11 Network Models and Systemic Risk Assessment
- 12 Strategic Interactions on Financial Networks for the Analysis of Systemic Risk
- 13 Network Structure and Systemic Risk in Banking Systems
- PART V SYSTEMIC RISK ANDMATHEMATICAL FINANCE
- PART VI COUNTERPARTY RISK AND SYSTEMIC RISK
- PART VII ALGORITHMIC TRADING
- PART VIII BEHAVIORAL FINANCE: THE PSYCHOLOGICAL DIMENSION OF SYSTEMIC RISK
- PART IX REGULATION
- PART X COMPUTATIONAL ISSUES AND REQUIREMENTS
- PART XI ACCOUNTING ISSUES
- References
11 - Network Models and Systemic Risk Assessment
from PART IV - NETWORKS
Published online by Cambridge University Press: 05 June 2013
Book contents
- Frontmatter
- Contents
- Contributors
- Introduction
- PART I DATA: THE PREREQUISITE FOR MANAGING SYSTEMIC RISK
- PART II STATISTICS AND SYSTEMIC RISK
- PART III MEASURING AND REGULATING SYSTEMIC RISK
- PART IV NETWORKS
- 11 Network Models and Systemic Risk Assessment
- 12 Strategic Interactions on Financial Networks for the Analysis of Systemic Risk
- 13 Network Structure and Systemic Risk in Banking Systems
- PART V SYSTEMIC RISK ANDMATHEMATICAL FINANCE
- PART VI COUNTERPARTY RISK AND SYSTEMIC RISK
- PART VII ALGORITHMIC TRADING
- PART VIII BEHAVIORAL FINANCE: THE PSYCHOLOGICAL DIMENSION OF SYSTEMIC RISK
- PART IX REGULATION
- PART X COMPUTATIONAL ISSUES AND REQUIREMENTS
- PART XI ACCOUNTING ISSUES
- References
Summary
Abstract Over recent years a number of network models of interbank markets have been developed and applied to the analysis of insolvency contagion and systemic risk. In this chapter we survey the concepts used in these models and discuss their main findings as well as their applications in systemic risk analysis. Network models are designed to address potential domino effects resulting from the failure of financial institutions. Specifically they attempt to answer the question of whether the failure of one institution will result in the subsequent failure of others. Since in a banking crisis authorities usually intervene to stabilize the banking system, failures and contagious failures by domino effects are very rarely observed in practice. Empirical analysis is thus difficult and as a consequence most studies of insolvency contagion are built on simulation models. In this chapter we describe in some detail how such simulations are designed and discuss the main insights that have so far been obtained by applications to the complex network of real world exposure data of banking systems.
Keywords Contagion, Interbank Market, Systemic Risk, Financial Stability. JEL-Classification Numbers: G21, C15, C81, E44
Introduction
Will the failure of a financial institution be a threat to the stability of the banking system? This is a key question for authorities in the management of a financial crisis. At the height of a crisis the general level of uncertainty and the panic among market participants usually lead to stabilization policies and interventions of the public sector.
- Type
- Chapter
- Information
- Handbook on Systemic Risk , pp. 287 - 305Publisher: Cambridge University PressPrint publication year: 2013
References
, , , and (2011). Measuring systemic risk. Working paper, New York University.CrossRefGoogle Scholar
, , , , and (2009). Towards a framework for quantifying systemic stability. International Journal of Central Banking 5 (3) 47–81.Google Scholar
, , and (2010). Resilience to contagion in financial networks. http://ssrn.com/abstract=1865997.
, and (2011). Contagion risk in the Danish interbank market. Tech. report 25. Denmark National Bank.Google Scholar
, , , and (2011). Measuring systemic risk in the finance and insurance sectors. MIT working paper.Google Scholar
, and (2002). Inter-bank exposures and systemic risk. Sveriges Riksbank Economic Review, 2 19-45.Google Scholar
, and (1997). Entropy optimizing methods for the estimation of tables. In Classification, Data Analysis, and Data Highways, , and (eds), Springer Verlag.Google Scholar
, , , and (2006). Systemic risk monitor: risk assessment and stress testing for the Austrian banking system. OeNB Financial Stability Report, 83-95.Google Scholar
(2009). Deciphering the liquidity and credit crunch 2007-2008. Journal of Economic Perspectives 23 (1) 77–100.CrossRefGoogle Scholar
, , and (2009). Market and funding liquidity. Review of Financial Studies 6 (22) 2201–38.CrossRefGoogle Scholar
, , and (2009). Lending relationships in the interbank market. Journal of Financial Intermediation 18 (1) 24–48.CrossRefGoogle Scholar
, and (2012). Why are banks highly interconnected? Working paper, Haskayne Business School. http://ssrn.com/abstract=1108870.
, and (2007). Interbank exposures: an empirical examination of systemic risk in the Belgian banking system. International Journal of Central Banking 3 (2) 123–171.Google Scholar
, and (2011). Measuring the systemic importance of interconnected banks. BIS Working Papers No 342.Google Scholar
(1994). Maximum likelihood estimation using the price data of the derivative contract. Mathematical Finance 4 (2) 155–167.CrossRefGoogle Scholar
(2000). Correction: maximum likelihood estimation using the price data of the derivative contract. Mathematical Finance 10 (4) 461–462.Google Scholar
, and (2001). Systemic risk in financial systems. Management Science 47 (2) 236–249.CrossRefGoogle Scholar
(2009). Financial networks, cross holdings, and limited liability. Oesterreichische Nationalbank, Working Paper 156.Google Scholar
, , and (2006a). Risk assessment for banking systems. Management Science 52 1301-1314.CrossRefGoogle Scholar
, , and (2006b). Using market information for banking system risk assessment. International Journal ofCentral Banking 2 (1) 137-165.Google Scholar
, , and (1997). Entropy Optimization and Mathematical Programming. Kluwer Academic Publishers.CrossRefGoogle Scholar
, , , , and (2007). State-dependent contagion risk: using micro data from swedish banks. Working paper, Sveriges Riksbank.Google Scholar
(2003). Interbank exposures: Quantifying the risk of contagion. Journal of Money Credit and Banking 1 (35) 111–128.Google Scholar
, and (2010). Contagion in financial networks. Proceedings of the Royal SocietyA 466 (2120), 2401-2423.CrossRefGoogle Scholar
, , and (2012). Macroprudential capital requirements and systemic risk. Journal of Financial Intermediation 21 594-618.CrossRefGoogle Scholar
(2009). The leverage cycle. In NBER Macroeconomics Annual, vol. 24. , , and (eds), Universityof Chicago Press.Google Scholar
, and (2004). Interbank exposures and systemic risk assessement: an empirical analysis for the Mexican banking sector. Working paper, Banco di Mexico.
(2008). Systemic risk in the financial sector: an analysis of the subprime-mortgage financial crisis. Tech. report 43. Max Planck Institute for Research on Collective Goods.Google Scholar
International Monetary Fund (2008). Financial stress and deleveraging: macro-financial implications and policy. In Global Financial Stability Report, IMF.
, and (2008). Liquidity, business cycles and monetary policy. Working Paper, Princeton University. http://www.princeton.edu/~kiyotaki/papers/km6-120215.pdf.Google Scholar
(2005). Measuring systemic risk: a risk management approach. Journal of Banking and Finance 29 (10) 2577–2603.CrossRefGoogle Scholar
, and . 2006. Interbank contagion in the Dutch banking sector: a sensitivity analysis. International Journal ofCentral Banking, 2(2), 99-133.Google Scholar
(2005). Domino effect in the Hungarian interbank market. Working paper, Hungarian National Bank.Google Scholar
(1973). A rational theory of option pricing. Bell Journal of Economics and Management Science 4 (1) 141–183.CrossRefGoogle Scholar
(2007). Assessing financial contagion in the interbank market: maximum entropy versus observed interbank lending patterns. Banca d'Italia, Temi di discussione 641.Google Scholar
(2011). Interbank credit lines as a channel of contagion. Journal of Financial Services Research 1 (29) 37–60.Google Scholar
, and (1998). Interbank lending and systemic risk: an empirical analysis. Swiss Journal of Economics and Statistics 134 685-704.Google Scholar
(2009). Financial interlinkages and risk of contagion in the Finnish interbank market. Tech. report 6. Bank of Finland.Google Scholar
(2011). Simulation methods to assess the danger of contagion in interbank networks. Journal of Financial Stability, 7 111-125.CrossRefGoogle Scholar
, and (2004). Estimating bilateral exposures in the German interbank market: is there a danger of contagion?European Economic Review 48 (4) 827–849.CrossRefGoogle Scholar
(2002). A simple model of global cascades on random networks. Proceedings of the National Academy of Sciences 99 766-771.CrossRefGoogle ScholarPubMed
(2004). Financial interlinkages in the United Kingdom's interbank market and the risk of contagion. Tech. report 230. Bank of England.Google Scholar
- 35
- Cited by