Network models of financial systemic risk: a review
Complex networks model the links between financial institutions and how these channels can transition from diversifying to propagating risk.
Journal of Computational Social Science 1, 81 (2017)
F. Caccioli, P. Barucca, T. Kobayashi
















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.
More in Systemic risk
Default cascades in networks
The optimal architecture of a financial system is only dependent on its topology when the market is illiquid, and no topology is always superior.
Non-linear distress propagation
Non-linear models of distress propagation in financial networks characterise key regimes where shocks are either amplified or suppressed.
Cascades in flow networks
Coupled distribution grids are more vulnerable to a cascading systemic failure but they have larger safe regions within their networks.
Immunisation of systemic risk
Targeted immunisation policies limit distress propagation and prevent system-wide crises in financial networks according to sandpile models.
The interbank network
The large-scale structure of the interbank network changes drastically in times of crisis due to the effect of measures from central banks.
Interbank controllability
Complex networks detect the driver institutions of an interbank market and ascertain that intervention policies should be time-scale dependent.
Fragility of the interbank network
The speed of a financial crisis outbreak sets the maximum delay before intervention by central authorities is no longer effective.
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.
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.