Systemic Risk and Vulnerabilities of Bank Networks

54 Pages Posted: 10 Oct 2017 Last revised: 12 Oct 2017

See all articles by Irena Vodenska

Irena Vodenska

Boston University Metropolitan College

Hideaki Aoyama

RIKEN iTHEMS; Research Institute for Economy, Industry and Trade (RIETI)

Alexander P. Becker

Boston University - Department of Physics

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies

Hiroshi Iyetomi

Niigata University

Eliza Lungu

Kyoto University

Date Written: October 9, 2017


Stability of the banking system and macro-prudential regulation are essential for healthy economic growth. In this paper we study the European bank network and its vulnerability to stressing differ- ent bank assets. The importance of macro-prudential policy is emphasized by the inherent vulnerability of the financial system, high level of leverage, interconnectivity of system’s entities, similar risk exposure of financial institutions, and susceptibility for systemic crisis propagation through the system. Current stress tests conducted by the European Banking Authority do not take in consideration the connectivity of the banks and the potential of one bank vulnerability spilling over to the rest of the system. We create a bipartite network with bank nodes on one hand and asset nodes on the other with weighted links between the two layers based on the level of different countries’ sovereign debt holdings by each bank. We propose a model for systemic risk propagation based on common bank exposures to specific asset classes. We introduce the similarity in asset distribution among the banks as a measure of bank closeness. We link the closeness of asset distributions to the likelihood that banks will experience a similar level and type of distress in a given adverse scenario. We analyze the dynamics of tier 1 capital ratio after stressing the bank network and find that while the system is able to withstand shocks for a wide range of parameters, we identify a critical threshold for asset risk beyond which the system transitions from stable to unstable.

Keywords: Systemic Risk, Macroprudential Regulation, European Bank Network, Stress Testing, Portfolio Overlap

Suggested Citation

Vodenska, Irena and Aoyama, Hideaki and Becker, Alexander and Fujiwara, Yoshi and Iyetomi, Hiroshi and Lungu, Eliza, Systemic Risk and Vulnerabilities of Bank Networks (October 9, 2017). Available at SSRN: or

Irena Vodenska (Contact Author)

Boston University Metropolitan College ( email )

808 Commonwealth Avenue
Boston, MA 02115
United States

Hideaki Aoyama

RIKEN iTHEMS ( email )

Wako, Saitama 351-0198
+81-9019011954 (Phone)

Research Institute for Economy, Industry and Trade (RIETI) ( email )

1-3-1 Kasumigaseki
Tokyo 100-8901

Alexander Becker

Boston University - Department of Physics ( email )

590 Commonwealth Avenue
Boston, MA 02215
United States

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies ( email )

7-1-28 Minato-jima, Minami-machi
Kobe, Hyogo 650-0047

Hiroshi Iyetomi

Niigata University ( email )

8050 Ikarashi-2-cho
Niigata, 9502181

Eliza Lungu

Kyoto University ( email )

Kyoto, 606-8501

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