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Default cascades in complex networks: topology and systemic risk
Tarik Roukny1, Hugues Bersini, Hugues Pirotte
11] IRIDIA, ULB, Brussels, Belgium [2] SBS-EM Center E. Bernheim, ULB, Brussels, Belgium.
Scientific Reports
|September 27, 2013
Summary
Financial system architecture is crucial. Network topology significantly impacts bank stability, especially during market illiquidity, with no single design being universally optimal.
Area of Science:
- Financial stability
- Network science
- Systemic risk analysis
Background:
- The optimal architecture of financial systems remains an open question, highlighted by recent crises.
- Understanding bank network stability is critical for financial system resilience.
Purpose of the Study:
- To investigate the stability of benchmark financial network topologies.
- To analyze the influence of network structure, capital ratios, market illiquidity, and shock types on bank defaults.
Main Methods:
- Simulated cascading default dynamics in bank networks.
- Analysis of various network topologies (e.g., scale-free, homogeneous).
- Incorporation of key financial drivers: capital ratios, market illiquidity, and shock types (random vs. targeted).
Main Results:
- Network topology's impact on stability is substantial but conditional, primarily emerging during periods of market illiquidity.
- No single network topology consistently outperforms others; scale-free networks exhibit both enhanced robustness and fragility compared to homogeneous architectures.
- Findings suggest complex interdependencies between network structure and market conditions.
Conclusions:
- The optimal financial system architecture is context-dependent, not universally defined.
- Policy implications arise regarding the design of financial networks, particularly concerning illiquidity management.
- The study provides a methodological framework applicable to real-world interbank market data.
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