[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v15y2014icp241-256.html
   My bibliography  Save this article

Rethinking financial stability: Challenges arising from financial networks’ modular scale-free architecture

Author

Listed:
  • León, Carlos
  • Berndsen, Ron J.
Abstract
We examine the connective architecture of the main Colombian payment and settlement systems in order to update what we know about local financial networks, and to elaborate on the main consequences for financial stability. Evidence suggests that local financial networks display a modular (i.e. clustered) scale-free (i.e. inhomogeneous) architecture. Results concur with other real-world networks, and propose new insights and challenges for authorities contributing to financial stability. For instance, (i) traditional reductionist assumptions for modeling financial systems (e.g. homogeneity) may be particularly misleading; (ii) the observed modular scale-free architecture favors robustness and resilience; (iii) the generating process of such architecture overlaps with literature on trading relationships; (iv) carelessly reducing inhomogeneity in financial systems may backfire in the form of a less robust and less resilient financial system; and (v) financial authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements.

Suggested Citation

  • León, Carlos & Berndsen, Ron J., 2014. "Rethinking financial stability: Challenges arising from financial networks’ modular scale-free architecture," Journal of Financial Stability, Elsevier, vol. 15(C), pages 241-256.
    • Handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:241-256
    DOI: 10.1016/j.jfs.2014.10.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308914001119
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfs.2014.10.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wetherilt, Anne & Zimmerman, Peter & Soramaki, Kimmo, 2010. "The sterling unsecured loan market during 2006-08: insights from network theory," Bank of England working papers 398, Bank of England.
    2. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    3. in ’t Veld, Daan & van Lelyveld, Iman, 2014. "Finding the core: Network structure in interbank markets," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 27-40.
    4. Ms. Sheri M. Markose, 2012. "Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super-Spreader Tax," IMF Working Papers 2012/282, International Monetary Fund.
    5. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    6. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    7. Carlos León & Clara Machado & Andrés Murcia, 2013. "Macro-prudential assessment of Colombian financial institutions’ systemic importance," Borradores de Economia 800, Banco de la Republica de Colombia.
    8. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    9. Becher, Christopher & Millard, Stephen & SoramÃÂäki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
    10. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    11. L. Bargigli & G. di Iasio & L. Infante & F. Lillo & F. Pierobon, 2015. "The multiplex structure of interbank networks," Quantitative Finance, Taylor & Francis Journals, vol. 15(4), pages 673-691, April.
    12. John Kambhu & Neel Krishnan & Scott Weidman, 2007. "Part 1: Introduction to New Directions for Understanding Systemic Risk," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Nov), pages 3-14.
    13. Carlos León & Jhonatan Pérez & Luc Renneboog, 2014. "A multi-layer network of the sovereign securities market," Borradores de Economia 12036, Banco de la Republica.
    14. Craig, Ben & von Peter, Goetz, 2014. "Interbank tiering and money center banks," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 322-347.
    15. Marc Pröpper & Iman van Lelyveld & Ronald Heijmans, 2008. "Towards a Network Description of Interbank Payment Flows," DNB Working Papers 177, Netherlands Central Bank, Research Department.
    16. F. Kyriakopoulos & S. Thurner & C. Puhr & S. W. Schmitz, 2009. "Network and eigenvalue analysis of financial transaction networks," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 71(4), pages 523-531, October.
    17. Philip Anderson, 1999. "Perspective: Complexity Theory and Organization Science," Organization Science, INFORMS, vol. 10(3), pages 216-232, June.
    18. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    19. Martínez-Jaramillo Serafín & Alexandrova-Kabadjova Biliana & Bravo-Benítez Bernardo & Solórzano-Margain Juan Pablo, 2012. "An Empirical Study of the Mexican Banking System's Network and its Implications for Systemic Risk," Working Papers 2012-07, Banco de México.
    20. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
    21. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    22. John Kambhu & Neel Krishnan & Scott Weidman, 2007. "Preface to New Directions for Understanding Systemic Risk," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Nov).
    23. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    24. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.
    25. Arinaminpathy, Nimalan & Kapadia, Sujit & May, Robert, 2012. "Size and complexity in model financial systems," Bank of England working papers 465, Bank of England.
    26. Robert M. May & Simon A. Levin & George Sugihara, 2008. "Ecology for bankers," Nature, Nature, vol. 451(7181), pages 893-894, February.
    27. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    28. Beyeler, Walter E. & Glass, Robert J. & Bech, Morten L. & Soramäki, Kimmo, 2007. "Congestion and cascades in payment systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 693-718.
    29. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
    30. Battiston, Stefano & Gatti, Domenico Delli & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Default cascades: When does risk diversification increase stability?," Journal of Financial Stability, Elsevier, vol. 8(3), pages 138-149.
    31. John Kambhu & Neel Krishnan & Scott Weidman, 2007. "Part 5: Concluding observations: New Directions for Understanding Systemic Risk," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Nov), pages 53-58.
    32. Soramäki, Kimmo & Cook, Samantha, 2013. "SinkRank: An algorithm for identifying systemically important banks in payment systems," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-27.
    33. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    34. Leung, C.C. & Chau, H.F., 2007. "Weighted assortative and disassortative networks model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 378(2), pages 591-602.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. León, C., 2015. "Financial stability from a network perspective," Other publications TiSEM bb2e4e44-e842-45c6-a946-4, Tilburg University, School of Economics and Management.
    2. Berndsen, Ron J. & León, Carlos & Renneboog, Luc, 2018. "Financial stability in networks of financial institutions and market infrastructures," Journal of Financial Stability, Elsevier, vol. 35(C), pages 120-135.
    3. León, Carlos & Machado, Clara & Sarmiento, Miguel, 2018. "Identifying central bank liquidity super-spreaders in interbank funds networks," Journal of Financial Stability, Elsevier, vol. 35(C), pages 75-92.
    4. León, C. & Berndsen, R.J. & Renneboog, L.D.R., 2014. "Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures," Other publications TiSEM 0de9add3-0338-4575-9c00-b, Tilburg University, School of Economics and Management.
    5. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    6. Sam Langfield & Kimmo Soramäki, 2016. "Interbank Exposure Networks," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 3-17, January.
    7. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    8. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    9. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    10. Adão, Luiz F.S. & Silveira, Douglas & Ely, Regis A. & Cajueiro, Daniel O., 2022. "The impacts of interest rates on banks’ loan portfolio risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    11. Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2017. "Network centrality and funding rates in the e-MID interbank market," Journal of Financial Stability, Elsevier, vol. 33(C), pages 346-365.
    12. Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 583-608.
    13. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    14. Langfield, Sam & Liu, Zijun & Ota, Tomohiro, 2014. "Mapping the UK interbank system," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 288-303.
    15. repec:zbw:bofrdp:2013_019 is not listed on IDEAS
    16. Carlos León & Ron J. Berndsen, 2013. "Modular scale-free architecture of Colombian financial networks: Evidence and challenges with financial stability in view," Borradores de Economia 11104, Banco de la Republica.
    17. Affinito, Massimiliano & Franco Pozzolo, Alberto, 2017. "The interbank network across the global financial crisis: Evidence from Italy," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 90-107.
    18. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    19. Toivanen, Mervi, 2013. "Contagion in the interbank network : An epidemiological approach," Research Discussion Papers 19/2013, Bank of Finland.
    20. Matteo Smerlak & Brady Stoll & Agam Gupta & James S Magdanz, 2015. "Mapping Systemic Risk: Critical Degree and Failures Distribution in Financial Networks," PLOS ONE, Public Library of Science, vol. 10(7), pages 1-15, July.
    21. Tao Xu & Jianmin He & Shouwei Li, 2016. "Multi-Channel Contagion In Dynamic Interbank Market Network," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 19(06n07), pages 1-25, September.

    More about this item

    Keywords

    Financial networks; Contagion; Resilience; Robustness; Fragility;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:241-256. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.