Systemic risk in banking networks: Advantages of "tiered" banking systems

Author(s)
Mariya Teteryatnikova
Abstract

This paper studies the risk and potential impact of system-wide defaults in a tiered banking network, where a small group of head institutions has many credit linkages with other banks, while the majority of banks have only a few links. A network is random and displays a given distribution of the number of banks[U+05F3] linkages, known as degree. We model tiering by a negative correlation between degrees of neighboring banks and by a scale-free degree distribution. The main findings of the paper highlight the advantages of tiering. Both the risk of systemic crisis and the potential scope of the crisis are lower in systems with negative correlation of bank degrees than in other types of systems. Similarly, in scale-free networks, the resilience of the system to shocks is increasing with the level of tiering.

Organisation(s)
Department of Economics
Journal
Journal of Economic Dynamics and Control
Volume
47
Pages
186-210
No. of pages
25
ISSN
0165-1889
DOI
https://doi.org/10.1016/j.jedc.2014.08.007
Publication date
10-2014
Peer reviewed
Yes
Austrian Fields of Science 2012
502047 Economic theory
Keywords
ASJC Scopus subject areas
Control and Optimization, Applied Mathematics, Economics and Econometrics
Portal url
https://ucris.univie.ac.at/portal/en/publications/systemic-risk-in-banking-networks-advantages-of-tiered-banking-systems(2828ef55-569b-4612-bd5b-4d401e111267).html