Cascades in Real Interbank Markets
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We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the interbank loan network is structurally less stable after the financial crisis than it was before. To evaluate the influence of the network structure on market stability, we compare simulated cascades from the empirical network with results from different network models. The results show that the empirical network has non-random features, which cannot be captured by randomized networks. The analysis also reveals that simulations that assume homogeneity for banks and loan size tend to overestimate the fragility of the interbank market.
KeywordsInterbank loan network Systemic risk Cascades Null models
The authors thank Petter Holme, Martin Rosvall, and Thomas Lux for helpful discussions. FK thanks the Swedish Research Council. MR thanks the Leibniz Association for partial funding of this project.
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