On the computational complexity of measuring global stability of banking networks

DOI10.1007/S00453-013-9769-0zbMATH Open1307.91197arXiv1110.3546OpenAlexW1975419877MaRDI QIDQ487019FDOQ487019

Bhaskar Dasgupta, Lakshmi Kaligounder, Piotr Berman, Marek Karpinski

Publication date: 19 January 2015

Published in: Algorithmica (Search for Journal in Brave)

Abstract: Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called financial contagion, namely the spreading of instabilities or failures of individual components of the network to other, perhaps healthier, components. This leads to a natural question of whether the regulatory authorities could have predicted and perhaps mitigated the current economic crisis by effective computations of some stability measure of the banking networks. Motivated by such observations, we consider the problem of defining and evaluating stabilities of both homogeneous and heterogeneous banking networks against propagation of synchronous idiosyncratic shocks given to a subset of banks. We formalize the homogeneous banking network model of Nier et al. and its corresponding heterogeneous version, formalize the synchronous shock propagation procedures, define two appropriate stability measures and investigate the computational complexities of evaluating these measures for various network topologies and parameters of interest. Our results and proofs also shed some light on the properties of topologies and parameters of the network that may lead to higher or lower stabilities.

Full work available at URL: https://arxiv.org/abs/1110.3546

zbMATH Keywords

algorithmsstability indexapproximation hardnessbanking networkssystemic stability

Mathematics Subject Classification ID

Applications of graph theory (05C90) Deterministic network models in operations research (90B10) Approximation algorithms (68W25) Actuarial science and mathematical finance (91G99)

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Cited In (5)

• Financial contagion in banking networks with community structure
• An equilibrium model of interbank networks based on variational inequalities
• FINANCIAL CONTAGION IN LARGE, INHOMOGENEOUS STOCHASTIC INTERBANK NETWORKS
• Fair immunization and network topology of complex financial ecosystems
• Sensitivity and computational complexity in financial networks

Uses Software

• Epigrass
• FIN-STAB

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