Defuse the Bomb: Rewiring Interbank Networks

LEM Papers Series 2015/16

50 Pages Posted: 11 Jun 2015

See all articles by Matteo Chinazzi

Matteo Chinazzi

Northeastern University - Laboratory for the Modeling of Biological and Socio-Technical Systems (MOBS Lab)

Stefano Pegoraro

University of Notre Dame - Department of Finance

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Date Written: June 9, 2015

Abstract

In this paper we contribute to the debate on macro-prudential regulation by assessing which structure of the financial 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 different scenarios when the topology of the financial system, the characteristics of the financial 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 different market conditions. Our results demonstrate how connectivity, the topology of the markets and the characteristics of the financial institutions interact in determining the stability of the system.

Keywords: financial networks, systemic risk, contagion, regulation, network topology

JEL Classification: C63, G01, G21

Suggested Citation

Chinazzi, Matteo and Pegoraro, Stefano and Fagiolo, Giorgio, Defuse the Bomb: Rewiring Interbank Networks (June 9, 2015). LEM Papers Series 2015/16, Available at SSRN: https://ssrn.com/abstract=2616218 or http://dx.doi.org/10.2139/ssrn.2616218

Matteo Chinazzi (Contact Author)

Northeastern University - Laboratory for the Modeling of Biological and Socio-Technical Systems (MOBS Lab) ( email )

220 B RP
Boston, MA 02115
United States

Stefano Pegoraro

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
5746312240 (Phone)
46556 (Fax)

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

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