Contagion in Financial (Balance sheets) Networks


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



Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?

Claudio Raddatz


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


Contagion in Financial Networks

Prasanna Gai and Sujit Kapadia

March 2007


The Effect of the Interbank Network Structure on Contagion and Financial Stability

Co-Pierre Georg


Contagion Risk in Financial Networks

Ana Babus

February 2007


Financial Fragility and Contagion in Interbank Networks

Stefano Pegoraro


Complexity, concentration and contagion

Prasanna Gai , Andrew Haldane , Sujit Kapadia


Contagion in financial networks : a threat index

Gabrielle Demange∗

May 23, 2011


Liquidity and financial contagion




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


Capital and Contagion in Financial Networks

S. Battiston  G. di Iasio  L. Infante F. Pierobon


Contagion in the Interbank Network: an Epidemiological Approach

Mervi Toivanen


Complex Financial Networks and Systemic Risk: A Review

Spiros Bougheas and Alan Kirman


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



Financial Contagion in Networks

Antonio Cabrales Douglas Gale


Piero Gottardi


The Formation of Financial Networks

Ana Babus


Financial Networks and Contagion

By Matthew Elliott, Benjamin Golub, and Matthew O. Jackson


Chapter 21: Networks in Finance

Franklin Allen

Ana Babus


Interconnectedness: Building Bridges between Research and Policy

May 8-9, 2014


Size and complexity in model financial systems

Nimalan Arinaminpathya,1, Sujit Kapadiab, and Robert M. May


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



Liquidity Risk and Contagion

Rodrigo Cifuentes Gianluigi Ferrucci

Hyun Song Shin



Information Contagion and Bank Herding

Viral V. Acharya
Tanju Yorulmazer




Franklin Allen Ana Babus Elena Carletti


Credit Cycles

Nobuhiro Kiyotaki

John Moore



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




Francis A. Longstaff



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


Liquidity Sharing and Financial Contagion

John Nash

September 28, 2015


Pathways towards instability in financial networks


Marco Bardoscia,1 Stefano Battiston,2 Fabio Caccioli,3, 4 and Guido Caldarelli


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


Network Valuation in Financial Systems

Paolo Barucca  Marco Bardoscia Fabio Caccioli, Marco D’Errico1, Gabriele Visentin, Stefano Battiston, and Guido Caldarelli


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



Systemic Risk and Network Formation in the Interbank Market

Ethan Cohen-Cole  Eleonora Patacchini Yves Zenou

January 10, 2012!/menu/standard/file/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


Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems

Jorge A. Chan-Lau


Network models and financial stability

Erlend Nier, Jing Yang, Tanju Yorulmazer and Amadeo Alentorn

April 2008


Systemic risk in banking ecosystems


Andrew G. Haldane & Robert M. May


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


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



Financial Contagion in Networks

Antonio Cabrales, Douglas Gale and Piero Gottardi


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



Hyun Song Shin


Crisis Transmission in the Global Banking Network



Liquidity risk, cash-flow constraints and systemic feedbacks

Sujit Kapadia, Mathias Drehmann, John Elliott and Gabriel Sterne



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





Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on

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