Abstract
We measure contagion potential and stability of banking system on a randomized version of the credit contagion model by Steinbacher M, Steinbacher M, Steinbacher M (2012) Credit contagion in financial markets: a network-based approach. Available via SSRN. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2068716. Cited 30 Jan 2013. We introduce two estimators of the contagion potential of banks (liquidity-loss potential and α-criticality index (Steinbacher M, Steinbacher M, Steinbacher M (2012) Credit contagion in financial markets: a network-based approach. Available via SSRN. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2068716. Cited 30 Jan 2013)) and introduce Shannon’s entropy as a stability estimator. Our approach is systemic in that it enables an overall estimation of the capacity of the banking system to provide liquidity. Mechanism developed can be employed for measuring systemic risk of banking system as a whole.
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Notes
- 1.
Consult also the studies by Freixas, Parigi and Rochet [9] about banks under uncertainty of withdrawals, where banks are connected through interbank credits, the desing of financial networks that minimize the trade-off between risk sharing and the potential for collapse presented in [14] and Dasgupta’s [6] study about banks’ crossholdings of deposits as a source of contagion. Furthermore, reader shall also consult de Vries [7] and his dependency between banks’ portfolios of assets and potential for systemic breakdown, Haldane and May’s [11] study of contagion in financial markets, Gai and Kapadia’s [10] model of contagion in financial networks, Cifuentes et al. [5] model of financial institutions that are connected via portfolio holdings, and the study of Jorion and Zhang [13], who show credit contagion via counterparty effects.
- 2.
See [4] for stress test on Austrian interbank network structure with respect to the default of a single bank.
- 3.
Recoveries are kept on creditors’ balance sheets and do not enter the interbank lending market.
- 4.
37 banks are in the 1st domain with two bordering on the 2nd; one bank is in the 6th domain and it has relatively weak liquidity loss potential and low α-criticality index.
- 5.
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Steinbacher, M., Steinbacher, M., Steinbacher, M. (2014). Banks and Their Contagion Potential: How Stable Is Banking System?. In: Leitner, S., Wall, F. (eds) Artificial Economics and Self Organization. Lecture Notes in Economics and Mathematical Systems, vol 669. Springer, Cham. https://doi.org/10.1007/978-3-319-00912-4_13
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