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Understanding the fundamental dynamics of interbank networks

Teruyoshi Kobayashi, Taro Takaguchi

posted on 05 April 2017

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The global financial crisis in 2007-2009 demonstrated that systemic risk can spread all over the world through a complex web of financial linkages. In particular, interbank credit networks shape the core of the financial system, in which interconnected risk emerges from a massive number of temporal transactions between banks. However, the lack of fundamental knowledge about the dynamic nature of interbank networks makes it difficult to evaluate and control systemic risk. Here, we analyze the dynamics of real interbank networks at a daily temporal resolution. While daily networks have been flexibly changing their structure from day to day, entailing entries and exits of banks, we discover explicit dynamical patterns that have been surprisingly stable over time even amid the global financial crisis.
The emergence of these dynamical patterns is accurately reproduced by a model, in which banks' demand for trading follows a random walk.
The discovery of fundamental patterns in the daily evolution of interbank networks will enhance our ability to evaluate systemic risk and could contribute to the dynamic management of financial stability.

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