Network Structure and Systemic Risk in Banking Systems

41 Pages Posted: 2 Feb 2011 Last revised: 25 Apr 2012

See all articles by Rama Cont

Rama Cont

University of Oxford; CNRS

Amal Moussa

Columbia University

Edson Bastos e Santos

Central Bank of Brazil

Date Written: December 1, 2010

Abstract

We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index. We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution's contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining its systemic importance. These observations plead for capital requirements which depend on exposures, rather than aggregate balance sheet size, and which target systemically important institutions.

Keywords: systemic risk, default contagion, network models, macro-prudential regulation, insolvency, bank regulation

Suggested Citation

Cont, Rama and Moussa, Amal and Santos, Edson Bastos e, Network Structure and Systemic Risk in Banking Systems (December 1, 2010). Available at SSRN: https://ssrn.com/abstract=1733528 or http://dx.doi.org/10.2139/ssrn.1733528

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

CNRS ( email )

LPSM
Sorbonne University
Paris
France

HOME PAGE: http://rama.cont.perso.math.cnrs.fr/

Amal Moussa

Columbia University ( email )

Mail Code 4403
New York, NY 10027
United States

Edson Bastos e Santos

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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