Assessing the impact of incomplete information on the resilience of financial networks

This paper explores the issue of robustness against failure cascades for the network of interbank exposures. The available data were retrieved through the Bank for International Settlements database and report only incomplete information from which networks displaying a core-periphery structure were...

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Bibliographic Details
Published in:Annals of operations research Vol. 299; no. 1-2; pp. 721 - 745
Main Authors: Cinelli, Matteo, Ferraro, Giovanna, Iovanella, Antonio, Rotundo, Giulia
Format: Journal Article
Language:English
Published: New York Springer US 01.04.2021
Springer
Springer Nature B.V
Subjects:
Analysis
Banking industry
Banks
Business and Management
Cascades
Combinatorics
Computer simulation
Economic aspects
Economic models
Failure
Financial institutions
Financial systems
Hypotheses
Information theory
Networks
Operations research
Operations Research/Decision Theory
Propagation
Resilience
S.I.: Recent Developments in Financial Modeling and Risk Management
Theory of Computation
Italy
Rome Italy
C63
Cross-border banking
G20
Network analysis
Financial interconnectedness
Incomplete information
Resilience
ISSN:0254-5330, 1572-9338
Online Access:Get full text
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Summary:This paper explores the issue of robustness against failure cascades for the network of interbank exposures. The available data were retrieved through the Bank for International Settlements database and report only incomplete information from which networks displaying a core-periphery structure were produced. A model of financial contagion was set up to estimate the width and length of the cascades, and was run on the networks detected from the data, as well as simulated data. The role of incomplete information was taken into account by considering a worst-case scenario in which unobserved links were assumed to be present. Given the core-periphery structure of the network, the worst-case scenario was studied in different sub-cases in which different periphery organisations were considered. Simulations showed that the actual network was far from the worst scenario for the propagation of contagion, meaning that the role of unobserved links can substantially alter the resilience of the whole network.
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-019-03306-y