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Early-warning signals of topological collapse in interbank networks.

Squartini T, van Lelyveld I, Garlaschelli D - Sci Rep (2013)

Bottom Line: The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions.These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done.We discuss important implications for bank regulatory policies.

View Article: PubMed Central - PubMed

Affiliation: Instituut-Lorentz for Theoretical Physics, Leiden Institute of Physics, University of Leiden, Niels Bohrweg 2, 2333 CA Leiden, The Netherlands.

ABSTRACT
The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear - but unpredictable - signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.

No MeSH data available.


Related in: MedlinePlus

Triadic z-scores for all the 44 quarters, grouped into four subperiods, under the RCM.First subperiod: t1–t10 (top-left); second subperiod: t11–t28 (top-right); third subperiod: t29–t40 (bottom-left); fourth subperiod: t41–t44 (bottom-right).
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f5: Triadic z-scores for all the 44 quarters, grouped into four subperiods, under the RCM.First subperiod: t1–t10 (top-left); second subperiod: t11–t28 (top-right); third subperiod: t29–t40 (bottom-left); fourth subperiod: t41–t44 (bottom-right).

Mentions: Before answering this question, we stress that although fig. 3 might look quite different under the RCM, we find similar results in that case as well. As before, the motif profiles calculated under the RCM over the entire 1998–2008 period do not collapse to a universal distribution (see SI). Still, inside each of the four subperiods we identified earlier, the profiles are coherent (see fig. 5).


Early-warning signals of topological collapse in interbank networks.

Squartini T, van Lelyveld I, Garlaschelli D - Sci Rep (2013)

Triadic z-scores for all the 44 quarters, grouped into four subperiods, under the RCM.First subperiod: t1–t10 (top-left); second subperiod: t11–t28 (top-right); third subperiod: t29–t40 (bottom-left); fourth subperiod: t41–t44 (bottom-right).
© Copyright Policy - open-access
Related In: Results  -  Collection

License
Show All Figures
getmorefigures.php?uid=PMC3842548&req=5

f5: Triadic z-scores for all the 44 quarters, grouped into four subperiods, under the RCM.First subperiod: t1–t10 (top-left); second subperiod: t11–t28 (top-right); third subperiod: t29–t40 (bottom-left); fourth subperiod: t41–t44 (bottom-right).
Mentions: Before answering this question, we stress that although fig. 3 might look quite different under the RCM, we find similar results in that case as well. As before, the motif profiles calculated under the RCM over the entire 1998–2008 period do not collapse to a universal distribution (see SI). Still, inside each of the four subperiods we identified earlier, the profiles are coherent (see fig. 5).

Bottom Line: The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions.These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done.We discuss important implications for bank regulatory policies.

View Article: PubMed Central - PubMed

Affiliation: Instituut-Lorentz for Theoretical Physics, Leiden Institute of Physics, University of Leiden, Niels Bohrweg 2, 2333 CA Leiden, The Netherlands.

ABSTRACT
The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear - but unpredictable - signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.

No MeSH data available.


Related in: MedlinePlus