How Likely Is Contagion in Financial Networks?

37 Pages Posted: 22 Aug 2015

See all articles by Paul Glasserman

Paul Glasserman

Columbia Business School

H. Peyton Young

Brookings Institution

Date Written: June 21, 2013

Abstract

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses, with minimal information about network topology, under a wide range of shock distributions. Expected losses from network effects are small without substantial heterogeneity in bank sizes and a high degree of reliance on interbank funding. They are also small unless shocks are magnified by some mechanism beyond simple spillover effects; these include bankruptcy costs, fire sales, and mark-to-market revaluations of assets. We illustrate the results with data on the European banking system.

Keywords: systemic risk, contagion, financial network

JEL Classification: D85, G21

Suggested Citation

Glasserman, Paul and Young, H. Peyton, How Likely Is Contagion in Financial Networks? (June 21, 2013). Office of Financial Research Working Paper No. 0009, Columbia Business School Research Paper No. 15-74, Available at SSRN: https://ssrn.com/abstract=2642423 or http://dx.doi.org/10.2139/ssrn.2642423

Paul Glasserman (Contact Author)

Columbia Business School ( email )

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H. Peyton Young

Brookings Institution ( email )

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