2016/08 LEM Working Paper Series

Non-performing loans, systemic risk and resilience in financial networks

Giulio Bottazzi, Alessandro De Sanctis and Fabio Vanni
financial crisis, network theory, non-performing loans, resilience, systemic risk

  JEL Classifications
G21, C63, G01, D85

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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