Keynote lectures

Authors

Irena Vodenska

Abstract

Stability of the banking system and macro-prudential regulation are essential for healthy economic growth. Bank networks are not isolated by national boundaries, but are rather global either through ownership or operations. Interconnectivity among banks contributes to increased vulnerability of the entire financial institution network. It is importance to understand the financial system susceptibility to distress, because of high level of leverage, interconnectivity of system's entities, similar risk exposure of financial institutions, and possibility of systemic crisis propagation through the network. Current bank stress tests, conducted by central banks, do not take in consideration the connectivity of the banks and the potential for a one bank’s financial risk spilling over to the rest of the system. To address this, we create a bipartite network model for cascading bank failures with bank nodes on one side and asset nodes on the other with weighted links between the two layers. We propose a model for systemic risk propagation based on common bank exposures to specific asset classes. After stressing the bank network, we find that while the system is able to withstand shocks for a wide range of parameters, we identify a critical threshold for asset risk beyond which the system transitions from stable to unstable. We also identify asset classes that increase bank vulnerabilities under given stress scenarios.

Keywords

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