Contagion in financial networks

A summary of Working Paper no. 383 is presented. In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. This paper models two key channels of contagion in financial...

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Bibliographic Details
Published in:Bank of England. Quarterly Bulletin 2010-04, Vol.50 (2), p.124
Main Authors: Gai, Prasanna, Kapadia, Sujit
Format: Article
Language:English
Subjects:
Balance sheets
Banking industry
Connectivity
Default
Financial institutions
Losses
Online Access:Get full text
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Summary:A summary of Working Paper no. 383 is presented. In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. This paper models two key channels of contagion in financial systems. The primary focus is on how losses may potentially spread via the complex network of direct counterparty exposures following an initial default. Results suggest that financial systems may exhibit a robust-yet-fragile tendency: while the probability of contagion may be low, the effects can be extremely widespread when problems occur.
ISSN:0005-5166
2399-4568