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Modeling Uncertainty in Banking Networks

  • Stojan Davidovic
  • Mirta Galesic
  • Konstantinos Katsikopoulos
  • Nimalan Arinaminpathy
Part of the Advances in Intelligent Systems and Computing book series (AISC, volume 290)

Abstract

Recent evidence from simulations of banking networks suggests that properties of the network design such as connectivity, bank size, or concentration affect networks’ ability to withstand stress (Arinaminpathy et al. 2012; Gai at al. 2011). However, those studies typically assume that all banks have complete knowledge about the whole system. Here we introduce uncertainty into what banks know about other banks. We model uncertainty scenarios in which uncertainty is translated into asymmetric distribution of information among banks relative to the proximity of information source. Instead of knowing everything agents are faced with information delay and limited information availability. We show that when uncertainty is introduced, the system becomes more fragile to sudden shocks and a relatively small distress can push the system over the tipping point in which the whole banking network collapses.

Keywords

banking networks uncertainty simulation 

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References

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    Arinaminpathy, N., Kapadia, S., May, R.M.: Size and complexity in model financial systems. Proceedings of the National Academy of Sciences USA 109(45), 18338–18343 (2012)CrossRefGoogle Scholar
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    Gai, P., Haldane, A., Kapadia, S.: Complexity, concentration and contagion. Journal of Monetary Economics 58(5), 453–470 (2011)CrossRefGoogle Scholar
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    Gai, P., Kapadia, S.: Contagion in financial networks. Proceedings of the Royal Society A 466(2120), 2401–2423 (2010)CrossRefMATHMathSciNetGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2014

Authors and Affiliations

  • Stojan Davidovic
    • 1
  • Mirta Galesic
    • 1
  • Konstantinos Katsikopoulos
    • 1
  • Nimalan Arinaminpathy
    • 2
  1. 1.Max-Planck-Institute for Human DevelopmentCenter for Adaptive Behavior and CognitionBerlinGermany
  2. 2.Faculty of Medicine, School of Public HealthImperial College LondonLondonUK

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