Network models of financial systemic risk: a review

F. Caccioli, P. Barucca, T. Kobayashi

Journal of Computational Social Science 1, 81 (2017)

#financialnetworks#financialrisk#cascadingfailure

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LQ placeholderStylized balance sheet of a bank

Stylized balance sheet of a bank

The global financial system can be represented as a large complex network in which banks, hedge funds and other financial institutions are interconnected to each other through visible and invisible financial linkages. Recently, a lot of attention has been paid to the understanding of the mechanisms that can lead to a breakdown of this network. This can happen when the existing financial links turn from being a means of risk diversification to channels for the propagation of risk across financial institutions. In this review article, we summarize recent developments in the modeling of financial systemic risk. We focus, in particular, on network approaches, such as models of default cascades due to bilateral exposures or to overlapping portfolios, and we also report on recent findings on the empirical structure of interbank networks. The current review provides a landscape of the newly arising interdisciplinary field lying at the intersection of several disciplines, such as network science, physics, engineering, economics, and ecology.

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