Networks and Systemic Risk in the Financial System

Oxford Review of Economic Policy, 35(4), 586-613. DOI: 10.1093/oxrep/grz023.

The University of Auckland Business School Research Paper Series

Posted: 1 Mar 2022

See all articles by Prasanna Gai

Prasanna Gai

University of Auckland Business School; Australian National University (ANU); Bank of England

Sujit Kapadia

Bank of England; European Central Bank (ECB)

Date Written: 2019

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)

Suggested Citation

Gai, Prasanna and Kapadia, Sujit and Kapadia, Sujit, Networks and Systemic Risk in the Financial System (2019). Oxford Review of Economic Policy, 35(4), 586-613. DOI: 10.1093/oxrep/grz023. , The University of Auckland Business School Research Paper Series, Available at SSRN: https://ssrn.com/abstract=4045164

Prasanna Gai (Contact Author)

University of Auckland Business School ( email )

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Australian National University (ANU) ( email )

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Bank of England ( email )

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Sujit Kapadia

European Central Bank (ECB) ( email )

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Germany

Bank of England ( email )

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United Kingdom
020-7601-5507 (Phone)

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