Research On Interbank Lending Network Evolution And Default Risk Contagion

The disastrous consequences of the financial crisis have raised great concerns about some problems threatening the stability of the financial system: the “Too-Big-to-Fail” problem and the “Too-Connected-to-Fail” problem.In order to solve these problems,regulators should not only evaluate the risk of every individual financial institution,but also consider the incremental contribution of one institution to the whole financial system.Therefore,studies begin to describe the interbank lending relationship and investigate default risk contagion using network theory.Empirical studies have identified the existence of money-center structures in real-world banking systems,but only a few studies have used endogenous network model to explain the formation of such structures.Moreover,many studies have illustrated the significant influence of network structure on default risk contagion,but few of them have demonstrated this influence from the perspective of endogenous lenders' selecting and further explore the influencing factors of default risk contagion.Motivated by these two issues,this study further explores the formation of interbank networks and default risk contagion based on endogenous lenders' selecting.Considering a banking network of N banks,we propose a dynamic network model of T periods,in which the interbank lending relationship derives from an endogenous selecting(ES)mechanism.Through multi-agent simulation analysis of the model,we find that the bank assets and contract sizes follow power-law and log-normal distributions,respectively,and the so called “money-center structure” is generated,which conform to the results of many empirical studies about the real world banking systems.Moreover,the money-center structure always exists when we alter some parameters within certain ranges.Specifically,either an increase of the lenders' selecting probability or that of the transition probability parameter for choosing potential lenders leads to a more obvious money-center structure.Our model and results help people understand the formation of the interbank network,and lay a foundation for the analysis of default risk contagion.We compare our endogenous selecting(ES)mechanism with a random selecting(RS)mechanism,and investigate the risk contagion effect to the changing values of some typical parameters under the above two mechanisms respectively.Generally,the money-center structure generated by ES is more resilient to default risk contagion than the random network structure generated by RS,because the former enables borrowers to borrow from more liquid banks with lower interest rates.From sensitivity analysis,we find that higher risk premium,lower initial proportion of net assets,higher liquid assets threshold,larger size of liquidity shocks,higher proportion of the initial investments and higher Central Bank interest rates all lead to severer default risk contagion.Moreover,the autocorrelation of deposits and lenders' selecting probability have non-monotonic effects on default risk contagion,and the effects differ under two mechanisms.These results not only help understanding the mechanism of default risk contagion,but also offer some policy insights for the regulators.