From Contagion Risk in Financial Networks
A notable feature of the modern Financial world is its high degree of interdependence. Banks and other Financial institutions are linked in a variety of ways. The mutual exposures that Financial institutions adopt towards each other connect the banking system in a network. Despite their obvious benefit, the linkages come at the cost that shocks, which initially affect only a few institutions, can propagate through the entire system. Since these linkages carry the risk of contagion, an interesting question is whether the degree of interdependence in the banking system sustains systemic stability.
From Contagion Risk in Financial Networks
Recently, there has been a substantial interest in looking for evidence of contagious failures of Financial institutions resulting from the mutual claims they have on one another. Most of these papers use balance sheet information to estimate bilateral credit relationships for different banking systems. Subsequently, the stability of the interbank market is tested by simulating the breakdown of a single bank.
From Contagion in Financial Networks (PG and SK)
In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. The recent advent of sophisticated financial products, such as credit default swaps and collateralised debt obligations, has heightened the complexity of these balance sheet connections still further, making it extremely di¢ cult for policymakers to assess the potential for contagion associated with the failure of an individual financial institution or from an aggregate shock to the system as a whole.
The interdependent nature of financial balance sheets also creates an environment for feedback elements to generate amplified responses to any shock to the financial system.
From Contagion in Financial Networks (PG and SK)
The interactions between financial intermediaries following shocks make for non-linear system dynamics, and our model provides a framework for isolating the probability and spread of contagion when claims and obligations are interlinked. We find that financial systems exhibit a robust-yet-fragile tendency. While greater connectivity reduces the likelihood of widespread default, the impact on the financial system, should problems occur, could be on a significantly larger scale than hitherto. The model also highlights how a priori indistinguishable shocks can have very different consequences for the financial system. The resilience of the network to large shocks in the past is no guide to future contagion, particularly if shocks hit the network at particular pressure points associated with underlying structural vulnerabilities.
From Contagion in Financial Networks (PG and SK)
The intuition underpinning these results is straightforward. In a more connected system, the counterparty losses of a failing institution can be more widely dispersed to, and absorbed by, other entities. So increased connectivity and risk sharing may lower the probability of contagion. But conditional on the failure of one institution triggering contagious defaults, a higher number of Financial linkages also increases the potential for contagion to spread more widely. In particular, greater connectivity increases the chances that institutions which survive the effects of the initial default will be exposed to more than one defaulting counterparty after the first round of contagion, thus making them vulnerable to a second-round default. The impact of any crisis that does occur could, therefore, be larger.
Key Sources of Research:
Credit Chains
Kiyotaki and Moore
1997
Click to access creditchains.pdf
Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?
Claudio Raddatz
Click to access Credit_chains_20090512_Complete.pdf
A flow network analysis of direct balance-sheet contagion in financial networks
Mario Eboli
Contagion in Financial Networks
Paul Glasserman H. Peyton Young
October 20, 2015
Click to access Contagion%20in%20Financial%20Networks.pdf
Contagion in Financial Networks
Prasanna Gai and Sujit Kapadia
March 2007
Click to access prasanna_gai_-_contagioninfinancialnetworks.pdf
The Effect of the Interbank Network Structure on Contagion and Financial Stability
Co-Pierre Georg
Click to access 2011_VISemRiscosBCB_10h40_CoPierreGeorg.pdf
Contagion Risk in Financial Networks
Ana Babus
February 2007
Click to access s1p2-babus.pdf
Financial Fragility and Contagion in Interbank Networks
Stefano Pegoraro
Click to access Stefano%20Pegoraro.pdf
Complexity, concentration and contagion
Prasanna Gai , Andrew Haldane , Sujit Kapadia
Click to access ComplexityConcentrationContagion.JME.GaiHaldaneKapdia2011.pdf
Contagion in financial networks : a threat index
Gabrielle Demange∗
May 23, 2011
Click to access gdemange_1105.pdf
Liquidity and financial contagion
TOBIAS ADRIAN HYUN SONG SHIN
Click to access etud1_0208.pdf
Financial globalization, financial crises and contagion
$ Enrique G. Mendoza Vincenzo Quadrini
The International Finance Multiplier
Paul Krugman
October 2008
How Likely is Contagion in Financial Networks?
Paul Glasserman,1 and H. Peyton Young
Click to access OFRwp0009_GlassermanYoung_HowLikelyContagionFinancialNetworks.pdf
Capital and Contagion in Financial Networks
S. Battiston G. di Iasio L. Infante F. Pierobon
Click to access 7ifcconf_infante.pdf
Contagion in the Interbank Network: an Epidemiological Approach
Mervi Toivanen
Complex Financial Networks and Systemic Risk: A Review
Spiros Bougheas and Alan Kirman
Click to access cfcm-2014-04.pdf
Systemic Risk, Contagion, and Financial Networks: a Survey
Matteo Chinazzi∗ Giorgio Fagiolo†
June 4, 2015
Systemic Risk and Stability in Financial Networks†
By Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi
2015
http://economics.mit.edu/files/10433
Financial Contagion in Networks
Antonio Cabrales Douglas Gale
Piero Gottardi
Click to access Survey%20Oxford%20Cabrales%20Gale%20Gottardi050315-3.pdf
The Formation of Financial Networks
Ana Babus
Financial Networks and Contagion
By Matthew Elliott, Benjamin Golub, and Matthew O. Jackson
Click to access financial_networks.pdf
Chapter 21: Networks in Finance
Franklin Allen
Ana Babus
Click to access Allen%20and%20Babus%20-%20aug%2020-08-Long-SSRN.pdf
Interconnectedness: Building Bridges between Research and Policy
May 8-9, 2014
http://www.imf.org/external/np/seminars/eng/2014/interconnect/
Size and complexity in model financial systems
Nimalan Arinaminpathya,1, Sujit Kapadiab, and Robert M. May
Click to access 18338.full.pdf
Financial system: shock absorber or amplifier?
by Franklin Allen and Elena Carletti
Transmission Channels of Systemic Risk and Contagion in the European Financial Network
Nikos Paltalidis†, Dimitrios Gounopoulos, Renatas Kizys, Yiannis Koutelidakis
Systemic risk, contagion and financial networks
Contagion in Banking Networks: The Role of Uncertainty
Stojan Davidovic
Mirta Galesic
Konstantinos Katsikopoulos Amit Kothiyal
Nimalan Arinaminpathy
Financial Contagion
F Allen and D Gale
2000
Liquidity Risk and Contagion
Rodrigo Cifuentes Gianluigi Ferrucci
Hyun Song Shin
2004
Information Contagion and Bank Herding
Viral V. Acharya
Tanju Yorulmazer
2006
Click to access acharya_yorulmazer.pdf
FINANCIAL CONNECTIONS AND SYSTEMIC RISK
Franklin Allen Ana Babus Elena Carletti
Credit Cycles
Nobuhiro Kiyotaki
John Moore
1997
Rethinking the financial network
Speech by Mr Andrew G Haldane,
28 April 2009.
Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk
Stefano Battiston Domenico Delli Gatti Mauro Gallegati , Bruce Greenwald , Joseph E. Stiglitz
Risk and Liquidity in a System Context
Hyun Song Shin
2008
Click to access 0518-hshin_riskliquid0.pdf
THE SUBPRIME CREDIT CRISIS AND CONTAGION IN FINANCIAL MARKETS
Francis A. Longstaff
2010
Balance-Sheet Contagion
Nobuhiro Kiyotaki and John Moore
American Economic Review, 2002, vol. 92, issue 2, pages 46-50
Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank
Xavier Freixas, Bruno Parigi and Jean-Charles Rochet
Systemic risk in financial systems
Eisenberg, L., Noe, T., 2001.
Systemic Risk and the Financial System
NAS-FRBNY Conference on New Directions in Understanding Systemic Risk
Intermediation and Voluntary Exposure to Counterparty Risk
Maryam Farboodi
Click to access MaryamFarboodiJMP.pdf
Liquidity Sharing and Financial Contagion
John Nash
September 28, 2015
Click to access Nash%20Liquidity%20Sharing.pdf
Pathways towards instability in financial networks
Marco Bardoscia,1 Stefano Battiston,2 Fabio Caccioli,3, 4 and Guido Caldarelli
Click to access 1602.05883v1.pdf
DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk
Stefano Battiston, Michelangelo Pulig, Rahul Kaushik, Paolo Tasca & Guido Caldarelli
Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable
By Joseph E. Stiglitz
Click to access 2010_Risk_and_Global_Economic.pdf
Network Valuation in Financial Systems
Paolo Barucca Marco Bardoscia Fabio Caccioli, Marco D’Errico1, Gabriele Visentin, Stefano Battiston, and Guido Caldarelli
Click to access 1606.05164.pdf
The Price of Complexity in Financial Network
Stefano Battiston, Guido Caldarelli, Robert M. May
Tarik Roukny and Joseph E. Stiglitz
November, 2015
Default Cascades in Complex Networks: Topology and Systemic Risk
Tarik Roukny Hugues Bersini1, Hugues Pirotte Guido Caldarelli & Stefano Battiston
Network Structure and Systemic Risk in Banking Systems
Rama Cont Amal Moussa Edson Bastos e Santos
December 1, 2010
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.444.2698&rep=rep1&type=pdf
Systemic Risk and Network Formation in the Interbank Market
Ethan Cohen-Cole Eleonora Patacchini Yves Zenou
January 10, 2012
Click to access Cohen_Patacchini_Zenou_22.pdf
A Network Analysis of the Evolution of the German Interbank Market
Tarik Roukny† Co-Pierre Georg‡ Stefano Battiston
DebtRank: A microscopic foundation for shock propagation
Marco Bardoscia1, Stefano Battiston, Fabio Caccioli, and Guido Caldarelli
Click to access 1504.01857.pdf
Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems
Jorge A. Chan-Lau
Click to access 00b7d529e09499414f000000.pdf
Network models and financial stability
Erlend Nier, Jing Yang, Tanju Yorulmazer and Amadeo Alentorn
April 2008
Click to access Nieretal09.pdf
Systemic risk in banking ecosystems
Andrew G. Haldane & Robert M. May
Click to access 02e7e522449ef4d3b0000000.pdf
Resilience to contagion in financial networks
Hamed Amini∗ Rama Cont† Andreea Minca‡
‘Too Interconnected To Fail’ Financial Network of US CDS Market: Topological Fragility and Systemic Risk
Sheri Markose1a, Simone Giansanteb, Ali Rais Shaghaghic
Click to access Giansante_JEBO_2012_i.pdf
Taking Uncertainty Seriously: Simplicity versus Complexity in Financial Regulation
David Aikman and Mirta Galesic and Gerd Gigerenzer and Sujit Kapadia and Konstantinos Katsikopolous and Amit Kothiyal and Emma Murphy and Tobias Neumann
2014
Click to access MPRA_paper_59908.pdf
Financial Contagion in Networks
Antonio Cabrales, Douglas Gale and Piero Gottardi
http://diana-n.iue.it:8080/bitstream/handle/1814/35258/ECO_2015-01.pdf?sequence=1&isAllowed=y
Systemic illiquidity in the interbank network
Gerardo Ferrara, Sam Langfield, Zijun Liu and Tomohiro Ota
April 2016
Interconnectedness and Systemic Risk: Lessons from the Financial Crisis and Policy Implications
Remarks by
Janet L. Yellen
Click to access Yellen20130104a.pdf
SECURITISATION AND FINANCIAL STABILITY
Hyun Song Shin
Click to access securitisation.pdf
Crisis Transmission in the Global Banking Network
2016
Liquidity risk, cash-flow constraints and systemic feedbacks
Sujit Kapadia, Mathias Drehmann, John Elliott and Gabriel Sterne
2012
Systemic Financial Feedbacks – Conceptual Framework and Modeling Implications
Dieter Gramlich and Mikhail V. Oet
Feedback Mechanisms in the Financial System: A Modern View
Mikhail V. Oet Oleg V. Pavlov
Viewpoints which Matter 
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