Systemic Risk and Stability in Financial Networks / Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi.

Format:

Book

Author/Creator:

Acemoglu, Daron.

Contributor:

National Bureau of Economic Research.

Ozdaglar, Asuman.

Tahbaz-Salehi, Alireza.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18727.

NBER working paper series no. w18727

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.

Notes:

Print version record

January 2013.