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Handbook on Systemic Risk by Joseph A. Langsam, Jean-Pierre Fouque

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13

Network Structure and Systemic Risk in Banking Systems

Rama Cont, Amal Moussa and Edson B. Santos

Abstract We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index.

We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution’s contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining ...

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