Multi-Layered Interbank Model For Assessing Systemic Risk

55 Pages Posted: 28 Aug 2016

See all articles by Mattia Montagna

Mattia Montagna

European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Date Written: August 26, 2016

Abstract

In this paper, we develop an agent-based multi-layered interbank network model based on a sample of large EU banks. The model allows for taking a more holistic approach to interbank contagion than is standard in the literature. A key finding of the paper is that there are material non-linearities in the propagation of shocks to individual banks when taking into account that banks are related to each other in various market segments. The contagion effects when considering the shock propagation simultaneously across multiple layers of interbank networks can be substantially larger than the sum of the contagion-induced losses when considering the network layers individually. In addition, a bank “systemic importance” measure based on the multi-layered network model is developed and is shown to outperform standard network centrality indicators. The finding of non-linear contagion effects when accounting for the interaction between the different layers of banks’ interlinkages have important policy implications. For example, it provides an argument for separating banks’ trading activities from their other intermediation activities.

Keywords: financial contagion, interbank market, network theory

JEL Classification: C45, C63, D85, G21

Suggested Citation

Montagna, Mattia and Kok, Christoffer, Multi-Layered Interbank Model For Assessing Systemic Risk (August 26, 2016). ECB Working Paper No. 1944. Available at SSRN: https://ssrn.com/abstract=2830546

Mattia Montagna (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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