Networks and Systemic Risk in the Financial System

Abstract

The complex web of exposures and interlinkages across the financial system highlights the relevance of network analysis in understanding systemic risk and guiding the design of financial regulation. This paper discusses how network models—and those based on epidemiological approaches in particular—offer a compelling description of the structure of real-world financial systems and shed light on different contagion mechanisms seen during the global financial crisis. We also review how these insights may inform macroprudential risk assessment and policy in the areas of stress-testing the financial system and the regulation of systemically important institutions. The role of non-bank financial intermediation and social networks in shaping financial system risk is also briefly considered. Full paper available at https://doi.org/10.1093/oxrep/grz023

Keywords: financial networks, systemic risk, contagion, financial crises, macroprudential policy, stress testing, systemically important financial institutions (SIFIs)