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Harmonic distances and systemic stability in heterogeneous interbank networks

Author

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  • Gabor Fukker

    (Magyar Nemzeti Bank)

Abstract

This paper investigates the effects of contagion in interbank lending networks. I introduce a new measure based on the harmonic distance of Acemoglu et al. (2015) and, motivated by their theoretical results, compare it to well-known centrality measures already applied in the systemic risk literature which do not take into account the structure of a contagion mechanism. I derive an explicit formula of size-adjusted harmonic distances and extend it with the usage of liquid assets for a heterogeneous banking system. The simulation results on scale-free and complete networks do not confirm that this new distance would perform better than "off-the-shelf" measures but its performance becomes similar to the best known measures in case of averaged networks which are applied in central banking analysis. This new measure is capable of identifying systemically important institutions and its time variation is also presented in an interbank network. I also test for the scale-free property of the Hungarian interbank lending network and besides, network measures as systemic risk indicators are analyzed on Hungarian data.

Suggested Citation

  • Gabor Fukker, 2017. "Harmonic distances and systemic stability in heterogeneous interbank networks," MNB Working Papers 2017/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2017/1
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    File URL: http://www.mnb.hu/letoltes/mnb-wp-2017-1-final.pdf
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    Citations

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    Cited by:

    1. László Békési & Lorant Kaszab & Szabolcs Szentmihályi, 2017. "The EAGLE model for Hungary - a global perspective," MNB Working Papers 2017/7, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Tibor Szendrei & Katalin Varga, 2020. "FISS - A Factor-based Index of Systemic Stress in the Financial System," Russian Journal of Money and Finance, Bank of Russia, vol. 79(1), pages 3-34, March.
    3. Fukker, Gábor & Kok, Christoffer, 2024. "On the optimal control of interbank contagion in the euro area banking system," Journal of Financial Stability, Elsevier, vol. 71(C).
    4. Berlinger, Edina & Dömötör, Barbara & Daróczi, Gergely & Vadász, Tamás, 2017. "Pénzügyi hálózatok mag-periféria szerkezete. A magyar bankközi fedezetlen hitelek piaca, 2003-2012 [The core periphery structure of financial networks: investigating Hungary s interbank deposit mar," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1160-1185.
    5. Fukker, Gábor & Kok, Christoffer, 2024. "On the optimal control of interbank contagion in the euro area banking system," Journal of Financial Stability, Elsevier, vol. 71(C).

    More about this item

    Keywords

    systemic risk; financial networks; interbank contagion; macroprudential regulation.;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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