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Credit Risk in Interbank Networks

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  • Vanessa Hoffmann De Quadros
  • Juan Carlos González-Avella
  • José Roberto Iglesias

Abstract

One of the most striking characteristics of modern financial systems is their complex interdependence, comprising a network of bilateral exposures in the interbank market, in which institutions with surplus liquidity can lend to those with a liquidity shortage. Empirical studies reveal that some interbank networks have features of scale-free networks. We explore the characteristics of financial contagion in networks whose distribution of links approaches a power law, using a model that defines banks’ balance sheets from information on network connectivity. By varying the parameters for the creation of the network, several interbank networks are built, in which the concentration of debt and credit comes from the distribution of links. The results suggest that networks that are more connected and have a high concentration of credit are more resilient to contagion than other types of networks analyzed.

Suggested Citation

  • Vanessa Hoffmann De Quadros & Juan Carlos González-Avella & José Roberto Iglesias, 2015. "Credit Risk in Interbank Networks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(S6), pages 27-41, November.
    • Handle: RePEc:mes:emfitr:v:51:y:2015:i:s6:p:s27-s41
    DOI: 10.1080/1540496X.2015.1080554
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    Cited by:

    1. Shuwen Gong & Huiwen Zou, 2023. "Simulation of interactive contagion between depositors' panic and banking risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 392-404, January.
    2. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.

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