A functional perspective on financial networks

Regular Article

Abstract

The financial sector is a critical component of any economic system, as it delivers key qualitative asset transformation services in terms of liquidity, maturity and volume. Although these functions could in principle be carried out separately by specialized actors, in the end it is their systemic co-evolution that determines how the aggregate economy performs and withstands disruptions. In this paper we argue that a functional perspective on financial intermediation can be usefully employed to investigate the functioning of financial networks. We do this in two steps. First, we use previously unreleased data to show that focusing on the economic functions performed over time by the different institutions exchanging funds in an interbank market can be informative, even if the underlying topological structure of their relations remains constant. Second, a set of alternative artificial histories are generated and stress-tested by using real data as a calibration base, with the aim of performing counterfactual welfare comparisons among different topological structures.

Keywords

Money-center network Functional perspective Interbank distress 

JEL Classification

C63 D85 G21 

Notes

Acknowledgements

This version of the paper has greatly benefited from the very constructive comments of two anonymous referees. We are grateful to Cassa Centrale Banca, in particular to Thomas Franchini, for the data used in this study, and to Seung Hwan Lee for having shared with us his codes. We also wish to thank for helpful discussions and suggestions Leonardo Bargigli, Pietro Battiston, Michele Catalano, Giovanni Cerulli, Giorgio Di Giorgio, Matteo Falagiarda, Giovanni Ferri, Guido Germano, Simone Giansante, Roberto Tamborini and the audiences at the ECB - Monetary Analysis Division (Frankfurt am Main, Germany), the 25th International Rome Conference on Money, Banking and Finance - Roma Tre University, the 57th Annual Conference of the Italian Economic Association, Bocconi University (Milano- Italy), the IWCEE15 - International Workshop on Computational Economics and Econometrics, Rome (Italy), the 20th WEHIA Workshop - SKEMA Business School, Sophia Antipolis (France) and the 5th International Workshop on Cooperative Finance and Sustainable Development, University of Trento (Italy). Massimo Molinari gratefully acknowledges the financial support of Fondazione Caritro. Part of the research undertaken for this paper was done when Massimo Molinari was at Sapienza University of Rome and supported by the funding grant 278/2016 from the same institution. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the Bank of Italy or the Eurosystem.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of Economics and ManagementUniversity of TrentoTrentoItaly
  2. 2.Market Operations DirectorateBank of ItalyRomeItaly

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