Filling in the Blanks: Network Structure and Interbank Contagion

27 Pages Posted: 12 Sep 2014

See all articles by Kartik Anand

Kartik Anand

Deutsche Bundesbank

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Goetz von Peter

Bank for International Settlements - Research and Policy Analysis

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2014

Abstract

The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum-density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side by side defines a useful range that bounds the cost of contagion in the true interbank network when counterparty exposures are unknown.

Keywords: Interbank markets, networks, entropy, intermediation, systemic risk

JEL Classification: G21, L14, D85, C63

Suggested Citation

Anand, Kartik and Craig, Ben R. and von Peter, Goetz, Filling in the Blanks: Network Structure and Interbank Contagion (August 1, 2014). BIS Working Paper No. 455, Available at SSRN: https://ssrn.com/abstract=2494993

Kartik Anand (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de/research_kartik_anand

Ben R. Craig

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goetz Von Peter

Bank for International Settlements - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
+ 41 61 280 8840 (Phone)

HOME PAGE: http://www.bis.org/author/goetz_von_peter.htm

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