Recreating Banking Networks under Decreasing Fixed Costs

30 Pages Posted: 13 Nov 2019

See all articles by Dietmar G. Maringer

Dietmar G. Maringer

University of Vienna

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Sandra Paterlini

University of Trento - Department of Economics and Management

Date Written: November 05, 2019

Abstract

Theory emphasizes the central role of the structure of networks in the behavior of financial systems and their response to policy. Real-world networks, however, are rarely directly observable: Banks’ assets and liabilities are typically known, but not who is lending how much and to whom. We first show how to simulate realistic networks that are based on balance-sheet information by minimizing costs where there is a fixed cost to forming a link. Second, we also show how to do this for a model with fixed costs that are decreasing in the number of links. To approach the optimization problem, we develop a new algorithm based on the transportation planning literature. Computational experiments find that the resulting networks are not only consistent with the balance sheets, but also resemble real-world financial networks in their density (which is sparse but not minimally dense) and in their core-periphery and disassortative structure.

Keywords: banking networks, network models, optimization

JEL Classification: E59, G21, C40

Suggested Citation

Maringer, Dietmar G. and Craig, Ben R. and Paterlini, Sandra, Recreating Banking Networks under Decreasing Fixed Costs (November 05, 2019). FRB of Cleveland Working Paper No. 19-21. Available at SSRN: https://ssrn.com/abstract=3485745 or http://dx.doi.org/10.2139/ssrn.3485745

Dietmar G. Maringer

University of Vienna

Bruenner Strasse 72
Vienna 1210, Vienna 1090
Austria

Ben R. Craig (Contact Author)

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

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
5
Abstract Views
67
PlumX Metrics