A Network Model of Financial System Resilience

41 Pages Posted: 21 Jul 2012

See all articles by Kartik Anand

Kartik Anand

Technische Universität Berlin (TU Berlin)

Prasanna Gai

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Simon Brennan

Bank of England

Matthew Willison

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2012

Abstract

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylised financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminary model generates broadly sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyse how our results are influenced by fire-sale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Keywords: Contagion, financial crises, network models, systemic risk

JEL Classification: C63, G01, G17, G21

Suggested Citation

Anand, Kartik and Gai, Prasanna and Kapadia, Sujit and Brennan, Simon and Willison, Matthew, A Network Model of Financial System Resilience (July 20, 2012). Bank of England Working Paper No. 458. Available at SSRN: https://ssrn.com/abstract=2114295 or http://dx.doi.org/10.2139/ssrn.2114295

Kartik Anand

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

Prasanna Gai

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
+020 7601 3583 (Phone)

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)

Simon Brennan

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Matthew Willison (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
131
Abstract Views
981
rank
137,928
PlumX Metrics