Static and dynamic networks in interbank markets. (12th February 2015)

• Record Type: Journal Article
• Authors: COHEN-COLE, ETHAN; PATACCHINI, ELEONORA; ZENOU, YVES; De Benedictis, Luca; Vitale, Maria Prosperina; Wasserman, Stanley
• Is Part Of: Network science. Volume 3:Number 1(2015)
• Page Start: 98
• Page End: 123
• Publication Date: 2015-02-12
• Subjects: Social networks -- Research -- Periodicals; System analysis -- Periodicals; System theory -- Periodicals; Computer science -- Periodicals; 003.72
• DOI: 10.1017/nws.2015.1
• Languages: English
• ISSNs: 2050-1242

Abstract

<abstract abstract-type="normal"> <title>Abstract</title> <p>This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors' lending decisions change, banks adjust their own decisions as a result: generating a "transmission" of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.</p> </abstract>