Systemic Risk in Scale Free Networks

FEDERICO TESLER; SEMESHENKO VIKTORIYA

Buenos Aires

Workshop; SoFIA 2016: Latin American School and Workshop on Data Analysis and Mathematical Modelling of Social Sciences; 2016

UBA, IIEP

Systemic risk in banking systems is a main concern for central banks charged with safeguarding overall financial stability. Systemic risk arises when there is the potential for multiple banks to fail, imposing costs on the financial system and ultimately on the economy as a whole. The structure of a banking-network, including the degree to which banks are connected to each other through bilateral exposures may play an important role in its susceptibility to systemic breakdown. Empirical analysis has shown that interbank networks often exhibit a scale-free topology, i.e. they are characterized by a few money center banks with many interconnections and a large number of small banks with few connections (Blavarg and Nimander (2002), Boss et al. (2004), van Lelyveld and Liedorp(2006), Degryse and Nguyen (2007)). In this work we develop a numerical study of systemic risk in such scale-free banking-systems. Networks are generated using a modified version of the Fitness-model adapted for static networks with given expected degree sequences. We analyze how the stability of the system evolves as the structure of network is changed by modifying key parameters as the maximum degree, power-law-coefficient, and banking-exposure.