Network dynamics of TOP payments

ABSTRACT We present an application of network theory to the Dutch payment system with specific attention to systemic stability. The network nodes comprise banks active in the Netherlands where links between the nodes are established by payments. Traditional measures such as transactions and values show that payments are at first relatively well-behaved through time. Analysis of the properties of prominent network measures over time shows that network characteristics become clear in the early phase of network formation (lasting about one hour) and develop more slowly afterward. The payment network is small in terms of actual nodes and links, compact in terms of path length and eccentricity, and sparse in terms of connectivity for all time periods. In the long run a mere 12% of the possible number of interbank connections is ever used and banks are on average only two steps apart. Relations in the network tend to be reciprocal. Our results also indicate that the network is susceptible to directed attacks. In a final section we show the effect of the start of the financial crisis on the network structure including the effects of the migration to TARGET2.