2016/08 | LEM Working Paper Series | ||||||||||||||||
Non-performing loans, systemic risk and resilience in financial networks |
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Giulio Bottazzi, Alessandro De Sanctis and Fabio Vanni |
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Keywords | |||||||||||||||||
financial crisis, network theory, non-performing loans, resilience, systemic risk
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JEL Classifications | |||||||||||||||||
G21, C63, G01, D85
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Abstract | |||||||||||||||||
After the outbreak of the financial crisis in 2007-2008 the level of
non-performing loans (NPLs) in the affected economies has
significantly increased. However, while in some countries this has
been a transitory phenomenon, in others it still represents a major
threat for financial stability and economic recovery. The present
work investigates the relationship between non-performing loans,
systemic risk and resilience of the financial system using a
network-based approach. We develop a model with two types of agents,
banks and firms, linked one another in a two-layers structure by
their reciprocal claims. The model is studied analytically and via
numerical simulations, and it allows to derive a synthetic measure
of systemic risk and to identify the maximum level of NPLs
sustainable by the financial system before it collapses. Finally,
for illustrative purposes, we present an application of the model to
Italy, Germany, and United Kingdom, using firm-level data for the
three countries.
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