2015/16 | LEM Working Paper Series | |
![]() |
||
Defuse the Bomb: Rewiring Interbank Networks |
||
Matteo Chinazzi, Stefano Pegoraro and Giorgio Fagiolo |
||
Keywords | ||
![]() |
![]() |
|
Financial networks, systemic risk, contagion, regulation, network topology
|
||
JEL Classifications | ||
![]() |
![]() |
|
C63, G01, G21
|
||
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.
| ||
Downloads | ||
![]() |
![]() |
|
|
||
![]() | ||
![]() |