Assessing Interbank Contagion Using Simulated Networks

44 Pages Posted: 12 Feb 2013

See all articles by Grzegorz Halaj

Grzegorz Halaj

National Bank of Poland

Christoffer Kok

European Central Bank (ECB)

Date Written: January 16, 2013

Abstract

This paper presents a new approach to randomly generate interbank networks while overcoming shortcomings in the availability of bank-by-bank bilateral exposures. Our model can be used to simulate and assess interbank contagion effects on banking sector soundness and resilience. We find a strongly non-linear pattern across the distribution of simulated networks, whereby only for a small percentage of networks the impact of interbank contagion will substantially reduce average solvency of the system. In the vast majority of the simulated networks the system-wide contagion effects are largely negligible. The approach furthermore enables to form a view about the most systemic banks in the system in terms of the banks whose failure would have the most detrimental contagion effects on the system as a whole. Finally, as the simulation of the network structures is computationally very costly, we also propose a simplified measure - a so-called Systemic Probability Index (SPI) - that also captures the likelihood of contagion from the failure of a given bank to honour its interbank payment obligations but at the same time is less costly to compute. We find that the SPI is broadly consistent with the results from the simulated network structures.

Keywords: Network Theory, interbank contagion, systemic risk, banking, stress-testing

Suggested Citation

Halaj, Grzegorz and Kok, Christoffer, Assessing Interbank Contagion Using Simulated Networks (January 16, 2013). ECB Working Paper No. 1506. Available at SSRN: https://ssrn.com/abstract=2201644

Grzegorz Halaj (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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