Filling in the Blanks: Network Structure and Interbank Contagion
Duration: 60 mins
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About this item
| Description: |
von Peter, G (Bank for International Settlements)
Monday 22 September 2014, 16:30-17:15 |
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| Created: | 2014-09-26 17:31 |
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| Collection: | Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches |
| Publisher: | Isaac Newton Institute |
| Copyright: | von Peter, G |
| Language: | eng (English) |
| Distribution: |
World
(downloadable)
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| Explicit content: | No |
| Aspect Ratio: | 16:9 |
| Screencast: | No |
| Bumper: | UCS Default |
| Trailer: | UCS Default |
| Abstract: | Co-authors : Kartik Anand (Bank of Canada), Ben Craig (Federal Reserve)
The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side by side defines a useful range that bounds the cost of systemic stress present in the true interbank network when counterparty exposures are unknown. |
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