Structural distortions in the Euro interbank market: The role of 'key players' during the recent market turmoil

Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instabilit...

The global financial crisis in 2007-2009 demonstrated that systemic risk can spread all over the world through a complex web of financial linkages, yet we still lack fundamental knowledge about the evolution of the financial web. In particular, interbank credit networks shape the core of the financial system, in which a time-varying interconnected risk emerges from a massive number of temporal transactions between banks. The current lack of understanding of the mechanics of i...

European Monetary Union continues to be characterised by significant macroeconomic imbalances. Germany has shown increasing current account surpluses at the expense of the other member states (especially the European periphery). Since the creation of a single currency has implied the impossibility of implementing competitive devaluations, trade imbalances within a monetary union can be considered unfair behaviour. We have modelled Eurozone trade flows in goods through a weigh...

We study the difference between the level of systemic risk that is empirically measured on an interbank network and the risk that can be deduced from the balance sheets composition of the participating banks. Using generalised DebtRank dynamics, we measure observed systemic risk on e-MID network data (augmented by BankFocus information) and compare it with the expected systemic risk of a null model network, obtained through an appropriate maximum-entropy approach constraining...

The recent financial crisis has stressed the need to understand financial systems as networks of interdependent countries, where cross-border financial linkages play the fundamental role. It has also been emphasized that the relevance of these networks relies on the representation of changes follow-on the occurrence of stress events. Adopting a topological approach we are able to address the role that network structures play in the spread of shocks and conversely, the effecti...

In the wake of the still ongoing global financial crisis, bank interdependencies have come into focus in trying to assess linkages among banks and systemic risk. To date, such analysis has largely been based on numerical data. By contrast, this study attempts to gain further insight into bank interconnections by tapping into financial discourse. We present a text-to-network process, which has its basis in co-occurrences of bank names and can be analyzed quantitatively and vis...

The combination of the network theoretic approach with recently available abundant economic data leads to the development of novel analytic and computational tools for modelling and forecasting key economic indicators. The main idea is to introduce a topological component into the analysis, taking into account consistently all higher-order interactions. We present three basic methodologies to demonstrate different approaches to harness the resulting network gain. First, a mul...

The interbank market is considered one of the most important channels of contagion. Its network representation, where banks and claims/obligations are represented by nodes and links (respectively), has received a lot of attention in the recent theoretical and empirical literature, for assessing systemic risk and identifying systematically important financial institutions. Different types of links, for example in terms of maturity and collateralization of the claim/obligation,...

This paper introduces a novel framework to study default dependence and systemic risk in a financial network that evolves over time. We analyse several indicators of risk, and develop a new latent space model to assess the health of key European banks before, during, and after the recent financial crises. First, we adopt the measure of CoRisk to determine the impact of such crises on the financial network. Then, we use minimum spanning trees to analyse the correlation structu...

We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the...