Complexity, concentration and contagion

By Prasanna Gai, Andrew G. Haldane, S. Kapadia. 2011

789 citations recorded by the source corpus.

This paper develops a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage. We show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007–2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages. Our model illustrates how greater complexity and concentration in the financial network may amplify this fragility. The analysis suggests how a range of policy measures – including tougher liquidity regulation, macro-prudential policy, and surcharges for systemically important financial institutions – could make the financial system more resilient.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/59f0bc27e915527a5923e2e3e3399ff34da232ba

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Citations in the corpus

A Macroprudential Approach to Financial Regulation (2011, background): “Figure 2A, which is adapted from Berger, Herring, and Szego (1995), shows the ratio of book equity to book assets for U.”
Filling in the blanks: network structure and interbank contagion (2014, background): “In our tests, greater diversification (as in the entropy estimate E) does not raise the severity of a crisis if one occurs—unlike what is predicted by some simulations (Nier et al. 2007) or theoretical results on ‘tipping points’ (Gai et al. 2011).”
Syndication, Interconnectedness, and Systemic Risk (2018, neutral): “[19] and Gai and Kapadia [20]).”
Finding the core: Network structure in interbank markets (2014, neutral): “For instance, Gai et al. [18] build a model around unsecured claims, repo activity and shocks to collateral haircuts.”
Rollover Risk, Network Structure and Systemic Financial Crises (2012, neutral): “al (2008), Haldane (2009) and Schweitzer et al.”
Interconnectedness in the global financial market (2017, positive): “Several studies exist that have mainly focused on dependencies and possible cascading effects in the financial sector, especially interbank markets (see Battiston et al., 2016; Summer, 2013; Gai et al., 2011; Levy-Carciente et al., 2015; Glasserman and Young, 2015).”