Contagion in Financial Networks

36 Pages Posted: 24 Mar 2010

See all articles by Prasanna Gai

Prasanna Gai

University of Auckland Business School; Australian National University (ANU); Bank of England

Sujit Kapadia

Bank of England; European Central Bank (ECB)

Date Written: March 23, 2010


This paper develops an analytical model of contagion in financial networks with arbitrary structure. We explore how the probability and potential impact of contagion is influenced by aggregate and idiosyncratic shocks, changes in network structure, and asset market liquidity. Our findings suggest that financial systems exhibit a robust-yet-fragile tendency: while the probability of contagion may be low, the effects can be extremely widespread when problems occur. And we suggest why the resilience of the system in withstanding fairly large shocks prior to 2007 should not have been taken as a reliable guide to its future robustness.

Keywords: Contagion, Network Models, Systemic Risk, Liquidity Risk, Financial Crises

JEL Classification: D85, G01, G21

Suggested Citation

Gai, Prasanna and Kapadia, Sujit and Kapadia, Sujit, Contagion in Financial Networks (March 23, 2010). Bank of England Working Paper No. 383, Available at SSRN: or

Prasanna Gai

University of Auckland Business School ( email )

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Sujit Kapadia (Contact Author)

European Central Bank (ECB) ( email )

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Bank of England ( email )

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