2012/03/30 by Igor Tsatskis, Tsatskis, Igor
Economics, Econometrics and Finance · Physics and Astronomy · #Banking stability, regulation, efficiency #Complex Network Analysis Techniques #Complex Systems and Time Series Analysis #Credit Risk and Financial Regulations #FOS: Economics and business #Risk Management (q-fin.RM) #q-fin.RM
paper · pdf · doi:10.48550/arxiv.1203.6778
6 pages, no figures
arxiv created 2012/03/30 · openalex publication_date 2012/03/30 · arxiv updated 2012/04/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
A simple banking network model is proposed which features multiple waves of bank defaults and is analytically solvable in the limiting case of an infinitely large homogeneous network. The model is a collection of nodes representing individual banks; associated with each node is a balance sheet consisting of assets and liabilities. Initial node failures are triggered by external correlated shocks applied to the asset sides of the balance sheets. These defaults lead to further reductions in asset values of all nodes which in turn produce additional failures, and so on. This mechanism induces indirect interactions between the nodes and leads to a cascade of defaults. There are no interbank links, and therefore no direct interactions, between the nodes. The resulting probability distribution for the total (direct plus systemic) network loss can be viewed as a modification of the well-known Vasicek distribution.