Default cascades in complex networks: topology and systemic risk

The optimal architecture of a financial system is only dependent on its topology when the market is illiquid, and no topology is always superior.

Scientific Reports 3, 1 (2013)

T. Roukny, H. Bersini, H. Pirotte, G. Caldarelli, S. Battiston

Default cascades in complex networks: topology and systemic risk

The recent crisis has brought to the fore a crucial question that remains still open: what would be the optimal architecture of financial systems? We investigate the stability of several benchmark topologies in a simple default cascading dynamics in bank networks. We analyze the interplay of several crucial drivers, i.e., network topology, banks' capital ratios, market illiquidity, and random vs targeted shocks. We find that, in general, topology matters only--but substantially--when the market is illiquid. No single topology is always superior to others. In particular, scale-free networks can be both more robust and more fragile than homogeneous architectures. This finding has important policy implications. We also apply our methodology to a comprehensive dataset of an interbank market from 1999 to 2011.

More in Systemic risk

  • Journal of Computational Social Science

    Modelling financial systemic risk

    Complex networks model the links between financial institutions and how these channels can transition from diversifying to propagating risk.

  • PLoS ONE

    Non-linear distress propagation

    Non-linear models of distress propagation in financial networks characterise key regimes where shocks are either amplified or suppressed.

  • Physica D Nonlinear Phenomena

    Cascades in flow networks

    Coupled distribution grids are more vulnerable to a cascading systemic failure but they have larger safe regions within their networks.

  • Journal de Physique IV

    Immunisation of systemic risk

    Targeted immunisation policies limit distress propagation and prevent system-wide crises in financial networks according to sandpile models.

  • Proceedings of the National Academy of Sciences of the USA

    The price of complexity

    Increasing the complexity of the network of contracts between financial institutions decreases the accuracy of estimating systemic risk.


    DebtRank and shock propagation

    A dynamical microscopic theory of instability for financial networks reformulates the DebtRank algorithm in terms of basic accounting principles.

  • Journal of Statistical Physics

    Bootstrapping topology and risk

    Information about 10% of the links in a complex network is sufficient to reconstruct its main features and resilience with the fitness model.