A Network Model of Financial System Resilience

37 Pages Posted: 23 Mar 2011

See all articles by Kartik Anand

Kartik Anand

Technische Universität Berlin (TU Berlin)

Simon Brennan

Bank of England

Prasanna Gai

Australian National University (ANU)

Sujit Kapadia

European Central Bank (ECB); Bank of England

Matthew Willison

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: March 17, 2011

Abstract

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, international financial institutions, and firms. Calibrating the model to publicly available advanced country banking sector data, we obtain sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyze how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also show how the model can be used to inform stress-testing exercises of the kind recently conducted by regulators.

Keywords: Interbank Network, Stress Test, Systemic Risk, Firesales

Suggested Citation

Anand, Kartik and Brennan, Simon and Gai, Prasanna and Kapadia, Sujit and Willison, Matthew, A Network Model of Financial System Resilience (March 17, 2011). Available at SSRN: https://ssrn.com/abstract=1789057 or http://dx.doi.org/10.2139/ssrn.1789057

Kartik Anand (Contact Author)

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

Simon Brennan

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Prasanna Gai

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Sujit Kapadia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

Matthew Willison

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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