Financial institutions are highly interconnected. Consequently, they form complex systems which are inherently unstable. This paper reviews empirical research on the instability of complex interbank systems. Three network approaches are distinguished: descriptions of interbank exposure networks; simulation and modelling; and the development of new metrics to describe network topology and individual banks’ relative importance. The paper concludes by inferring policy implications and priorities for future research.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price includes VAT (USA)
Tax calculation will be finalised during checkout.
A walk is a traversal of nodes along links without any constraints. In contrast a trail is a walk where a given link is not visited twice and a path is a walk where a given node is not visited twice.
CLS is the world’s largest settlement system, settling on peak days in 2013 almost $9 trillion worth of foreign exchange transactions on the books of 17 central banks (and currencies).
Acemoglu, D., Ozdaglar, A., & Tahbaz-Salehi, A. (2013). “Systemic risk and stability in financial networks”. NBER Working Paper No. 18727.
Adamic, L., Brunetti, C., Harris, J., & Kirilenko, A. (2012). Trading networks. Manuscript.
Akerlof, G. A. (1970). The market for lemons: quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500.
Aldasoro, I., & Angeloni, I. (2013). “Input-output-based measures of systemic importance”. SAFE Working Paper No. 29.
Allen, F., & Babus, A. (2009). Networks in finance. In P. R. Kleindorfer & J. R. Wind (Eds.), The network challenge: strategy, profit, and risk in an interlinked world (pp. 367–382). Saddle River: Wharton School Publishing.
Allen, F., & Gale, D. (2000). Financial contagion. Journal of Political Economy, 108(1), 1–33.
Alves, I., Ferrari, S., Franchini, P., Heam, J. C., Jurca, P., Langfield, S., Laviola, S., Liedorp, F., Sánchez, A., Tavolaro, S., & Vuillemey, G. (2013). “The structure and resilience of the European interbank market”. ESRB, Occasional Paper No.3.
Anderson, R. M., & May, R. M. (1991). Infectious diseases of humans: dynamics and control. Oxford: Oxford University Press.
Arciero, L., Heijmans, R., Heuver, R., Massarenti, M., Picillo, C., & Vacirca, F. (2013). “How to measure the unsecured money market? The Eurosystem’s implementation and validation using TARGET2 data”. DNB Working Paper No. 369.
Arthur, W. B., Holland, J. H., LeBaron, B., Palmer, R., & Tayler, P. (1997). Asset pricing under endogenous expectations in an artificial stock market. The Economy as an evolving complex system II. Reading, MA: Addison- Wesley.
Atalay, E., & Bech, M. L. (2008). The topology of the federal funds market. Physica A: Statistical Mechanics and its Applications, 389(22), 5223–5246.
Barabási, A. L., & Albert, R. (1999). Emergence of scaling in random networks. Science, 286(5439), 509–512.
Basel Committee on Banking Supervision (2013). “Global systemically important banks”.
Bastos e Santos, E., & Cont, R. (2010). “The Brazilian interbank network structure and systemic risk”. Banco Central do Brazil Working Paper No. 219.
Battiston, S., Puliga, M., Kaushik, R., Tasca, P., & Caldarelli, G. (2012). “DebtRank: Too central to fail? Financial networks, the Fed and systemic risk”. Nature, Scientific Reports 2, Article Number 541.
Bech, M. L., & Rørdam, K. B. (2009). The topology of danish interbank money flows. Banks and Bank Systems, 4(4), 48–65.
Billio, M., Getmansky, M., lo, A. W., & Pelizzon, L. (2012). econometric measures of systemic risk in the finance and insurance sectors. Journal of Financial Economics, 104(3), 535–559.
Bisias, D., Flood, M., Lo, A. W., & Valavanis, S. (2012). A survey of systemic risk analytics. Annual Review of Financial Economics, 4, 255–296.
Bollobás, B. (1998). Random graphs. London: Academic Press.
Bonacich, P. (1972). Factoring and weighting approaches to status scores and clique identification. Journal of Mathematical Sociology, 2(1), 113–120.
Bonacich, P. (1987). Power and centrality: a family of measures. American Journal of Sociology, 92(5), 1170–1182.
Borgatti, S. P. (2005). Centrality and network flow. Social networks, 27, 55–71.
Boss, M., Elsinger, H., Summer, M., & Thurner, S. (2004). The network topology of the interbank market. Quantitative Finance, 4(6), 677–684.
Callaway, D. S., Newman, M. E. J., Strogatz, S. H., & Watts, D. J. (2000). Network robustness and fragility: percolation on random graphs. Physical Review Letters, 85, 5468–5471.
Castrén, O., & Kristian, K. I. (2009). “Balance sheet interlinkages and macro-financial risk analysis in the euro area”. ECB Working Paper No. 1124.
Chan-Lau, J., Espinosa, M., Kay, G., & Juan, S. (2009). Assessing the systemic implications of financial linkages. Report: IMF Global Financial Stability.
Cifuentes, R., Ferrucci, G., & Shin, H. S. (2005). Liquidity risk and contagion. Journal of the European Economic Association, 3(2), 556–566.
Colander, D., Haas, A., Goldberg, M., Kirman, A., Lux, T., & Sloth, B. (2009). The financial crisis and the systemic failure of academic economics. Critical Review, 21(2—-3), 249–267.
Craig, B., & von Peter, G. (2014). “Interbank tiering and money center banks”. Journal of Financial Intermediation, forthcoming.
De Bandt, O., & Hartmann, P. (2000). “Systemic risk: A survey”. European Central Bank Working Paper No. 35.
De Masi, G., Iori, G., & Caldarelli, G. (2006). Fitness model for the Italian interbank money market. Physical Review E, 74(6), 066112.
Denbee, E., & McLafferty, J. (2013). “Liquidity saving in CHAPS: A simulation study”. In B. Alexandrova-Kabadjova, S. Martinez-Jaramillo, A. L. Garcia-Almanza & E. Tsang (Eds), Simulation in computational finance and economics: Tools and emerging applications, (pp. 120–142).
Degryse, H., & Nguyen, G. (2004). Interbank exposures: an empirical examination of systemic risk in the belgian banking system. International Journal of Central Banking, 3(2), 123–171.
Diamond, D. W., & Rajan, R. (2009). The credit crisis: conjectures about causes and remedies. American Economic Review P&P, 99(2), 606–610.
ECB (2003). “CLS - purpose, concept and implications”. European Central Bank Monthly Bulletin, January 2003, pp. 53–66.
ECB (2010). “Financial networks and financial stability”. European Central Bank Financial Stability Review, June 2010.
Fricke, D., & Lux, T. (2013). “On the distribution of links in the interbank network: Evidence from the e-mid overnight money market”. Kiel Institute for the World Economy Working Paper No. 1819.
Freixas, X., Parigi, B. M., & Rochet, J. C. (2000). Systemic risk, interbank relations, and liquidity provision by the central bank. Journal of Money, Credit and Banking, 32, 611–638.
Freeman, L. C. (1979). Centrality in social networks conceptual clarification. Social Networks, 1(3), 215–239.
Fruchterman, T., & Reingold, E. (1991). Graph drawing by force-directed placement. Software: Practice and Experience, 1164(11), 21–1129.
Furfine, C. (1999). The microstructure of the federal funds market. Institutions & Instruments, 8(5), 24–44.
Garratt, R., Mahadeva L., & Svirydenska, K. (2011). “Mapping systemic risk in the international banking network”. Bank of England Working Paper 413.
Georg, C. P. (2013). The effect of the interbank network structure on contagion and common shocks. Journal of Banking & Finance, 37(7), 2216–2228.
Gai, P., & Kapadia, S. (2010). Contagion in financial networks. Proceedings of the Royal Society A: Mathematical, Physical and Engineering Science, 466(2120), 2401–2423.
Haldane, A. (2009). Rethinking the financial network. Amsterdam, April: Speech delivered at the Financial Student Association.
Haldane, A., & May, R. M. (2011). Systemic risk in banking ecosystems. Nature, 469(7330), 351–355.
Heijmans, R., Heuver, R., & Walraven, D. (2010). “Monitoring the unsecured interbank money market using TARGET2 data”. De Nederlandsche Bank Working Paper no. 276.
Iazzetta, C., & Manna, M. (2009). “The topology of the interbank market: developments in Italy since 1990”. Banca d’Italia Working Paper no. 711.
Imakubo, K., & McAndrews, J. J. (2006). “Funding Levels for the New Accounts in BOJ-Net”. Bank of Japan Working Paper no. 06–E21.
Iori, G., De Masi, G., Precup, O. V., Gabbi, G., & Caldarelli, G. (2008). A network analysis of the italian overnight money market. Journal of Economic Dynamics and Control, 32(1), 259–278.
Jensen, H. J. (1998). Self-organized Criticality: Emergent Complex Behaviour in Physical and Biological Systems. Cambridge: Cambridge University Press.
Jiang, Z. Q., & Zhou, W. X. (2010). Complex stock trading network among investors. Physica A: Statistical Mechanics and its Applications, 389(21), 4929–4941.
Katz, L. (1953). A new status index derived from sociometric analysis. Psychometrika, 18(1), 39–43.
Kinney, R. (2005). Modeling cascading failures in the north american power grid. The European Physical Journal B-Condensed Matter and Complex Systems, 46(1), 101–107.
Langfield, S., Liu, Z., & Ota, T. (2014). “Mapping the UK interbank system”. Journal of Banking & Finance, forthcoming.
Lorenz, J., Battiston, S., & Schweitzer, F. (2009). Systemic risk in a unifying framework for cascading processes on networks. The European Physical Journal B, 71(4), 441–460.
Markose, S., Giansante, S., & Shaghaghi, A. R. (2012). Too interconnected to fail’: financial network of us cds market: topological fragility and systemic risk. Journal of Economic Behavior & Organization, 83(3), 627–646.
Martinez-Jaramillo, S. (2007). Artificial financial markets: an agent based approach to reproduce stylized facts and to study the Red Queen Effect. Centre for Computational Finance and Economic Agents (CCFEA): University of Essex.
Martinez-Jaramillo, S., & Tsang, E. P. K. (2009). An heterogeneous, endogenous and coevolutionary GP-based financial market. IEEE Transactions on Evolutionary Computation, 13(1), 33–55.
Minoiu, C., & Reyes, J. A. (2011). “A network analysis of global banking: 1978–2009”. IMF Working Paper no. 11/74.
Montagna, M., & Lux, T. (2013). “Hubs and resilience: towards more realistic models of the interbank markets”. Kiel Working Paper no. 1826.
Moore, C., & Newman, M. E. J. (2000). Exact solution of site and bond percolation on small-world networks. Physical Review E, 62(5), 7059.
Newman, M. E. J. (2003). The structure and function of complex networks. SIAM Review, 45, 167–256.
Nier, E., Jing, Y., Tanju, Y., & Amadeo, A. (2007). Network models and financial stability. Journal of Economic Dynamics and Control, 31(6), 2033–2060.
Page, L., Brin, S., Motwani, R., & Winograd, T. (1999). “The pagerank citation ranking: Bringing order to the web”. Technical Report 1999–66, Stanford InfoLab.
Sachtjen, M. L., Carrerras, B. A., & Lynch, V. E. (2000). Disturbances in a power transmission system. Physical Review E, 61(5), 4877–4882.
Scott, H. S. (2012). “Interconnectedness and contagion”. Committee on Capital Market Regulation.
Soramäki, K., Bech, M. L., Arnold, J., Glass, R. J., & Beyeler, W. E. (2007). The topology of interbank payment flows. Physica A: Statistical Mechanics and its Applications, 379(1), 317–333.
Soramäki, K., & Cook, S. (2013). SinkRank: An algorithm for identifying systemically important banks in payment systems. Economics: The Open-Access, Open-Assessment E-Journal, 7(2013–28), 1–27.
Watts, D. J., & Strogatz, S. H. (1998). Collective dynamics of ‘small-world’ networks. Nature, 393(6682), 440–442.
Wetherilt, A., Zimmerman, P., & Soramäki, K. (2009). “The sterling unsecured loan market during 2006–2008: insights from network topology”. Bank of England Working Paper no. 398.
About this article
Cite this article
Langfield, S., Soramäki, K. Interbank Exposure Networks. Comput Econ 47, 3–17 (2016). https://doi.org/10.1007/s10614-014-9443-x
- Systemic Risk
- Credit Default Swap
- Eigenvector Centrality
- Geodesic Path
- Interbank Market