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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

Temporal evolution of the triadic z-score for motif number 9, under the DCM (left) and under the RCM (right).
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f6: Temporal evolution of the triadic z-score for motif number 9, under the DCM (left) and under the RCM (right).

Mentions: Thus the only significant change occurring in the middle of 2000, after controlling for the dyadic structure, is due to motif 9. The temporal evolution of the latter is reported in fig. 6, under both models. We find that, from the third quarter of 2000 to the last quarter of 2004, motif 9 indeed shows a marked difference with respect to the rest of the period, and turns out to be strongly over-represented, highlighting an anomalously high number of triads of banks involved in circular lending loops with no reciprocation. Since this subperiod is only characterized by the over-representation of motif 9 (all other motifs are still approximately consistent with the RCM), we denote it as the ‘cyclic anomaly’ phase (highlighted in pink in figs. 5 and 6), and regard it as the earliest precursor of the 2008 crisis. Remarkably, when the cyclic anomaly phase ends and the pre-crisis phase begins, motif 9 suddenly changes from being the strongest over-represented to being the strongest under-represented motif under the RCM (while not significant under the DCM). Thus, it appears that non-reciprocated lending loops, that were the arrangement preferred by triads of banks before 2005, suddenly became the ‘most avoided’ triad. The following two periods (pre-crisis and crisis) are indeed mainly characterized by an increasingly strong under-representation of motifs 9 and 10 (see figs. 4, 5 and 6), which both involve a circular lending loop.


Early-warning signals of topological collapse in interbank networks.

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

Temporal evolution of the triadic z-score for motif number 9, under the DCM (left) and under the RCM (right).
© Copyright Policy - open-access
Related In: Results  -  Collection

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

f6: Temporal evolution of the triadic z-score for motif number 9, under the DCM (left) and under the RCM (right).
Mentions: Thus the only significant change occurring in the middle of 2000, after controlling for the dyadic structure, is due to motif 9. The temporal evolution of the latter is reported in fig. 6, under both models. We find that, from the third quarter of 2000 to the last quarter of 2004, motif 9 indeed shows a marked difference with respect to the rest of the period, and turns out to be strongly over-represented, highlighting an anomalously high number of triads of banks involved in circular lending loops with no reciprocation. Since this subperiod is only characterized by the over-representation of motif 9 (all other motifs are still approximately consistent with the RCM), we denote it as the ‘cyclic anomaly’ phase (highlighted in pink in figs. 5 and 6), and regard it as the earliest precursor of the 2008 crisis. Remarkably, when the cyclic anomaly phase ends and the pre-crisis phase begins, motif 9 suddenly changes from being the strongest over-represented to being the strongest under-represented motif under the RCM (while not significant under the DCM). Thus, it appears that non-reciprocated lending loops, that were the arrangement preferred by triads of banks before 2005, suddenly became the ‘most avoided’ triad. The following two periods (pre-crisis and crisis) are indeed mainly characterized by an increasingly strong under-representation of motifs 9 and 10 (see figs. 4, 5 and 6), which both involve a circular lending loop.

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