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We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the…
Banks in the interbank network can not assess the true risks associated with lending to other banks in the network, unless they have full information on the riskiness of all the other banks. These risks can be estimated by using network…
We study the formation of an optimal interbank network in a model where banks control both their supply of liquidity, through cash reserves, and their exposures to other banks' risky projects. The value of each bank's project may suddenly…
The latest financial crisis has painfully revealed the dangers arising from a globally interconnected financial system. Conventional approaches based on the notion of the existence of equilibrium and those which rely on statistical…
The negative externalities from an individual bank failure to the whole system can be huge. One of the key purposes of bank regulation is to internalize the social costs of potential bank failures via capital charges. This study proposes a…
The events of the last few years revealed an acute need for tools to systematically model and analyze large financial networks. Many applications of such tools include the forecasting of systemic failures and analyzing probable effects of…
This paper studies a systemic risk control problem by the central bank, which dynamically plans monetary supply to stabilize the interbank system with borrowing and lending activities. Facing both heterogeneity among banks and the common…
The 2008 financial crisis illustrated the need for a thorough, functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult, most recent…
A simple banking network model is proposed which features multiple waves of bank defaults and is analytically solvable in the limiting case of an infinitely large homogeneous network. The model is a collection of nodes representing…
Interbank deposits (loans and credits) are quite common in banking system all over the world. Such interbank co-operation is profitable for banks but it can also lead to collective financial failures. In this paper we introduce a new model…
We consider the problem of governing systemic risk in a banking system model. The banking system model consists in an initial value problem for a system of stochastic differential equations whose dependent variables are the log-monetary…
This paper studies the problem of optimally allocating a cash injection into a financial system in distress. Given a one-period borrower-lender network in which all debts are due at the same time and have the same seniority, we address the…
We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network…
A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central…
Complex non-linear interactions between banks and assets we model by two time-dependent Erd\H{o}s Renyi network models where each node, representing bank, can invest either to a single asset (model I) or multiple assets (model II). We use…
We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of…
We study financial networks with debt contracts and credit default swaps between specific pairs of banks. Given such a financial system, we want to decide which of the banks are in default, and how much of their liabilities can these…
We employ the mathematical programming approach in conjunction with the graph theory to study the structure of correspondent banking networks. Optimizing the network requires decisions to be made to onboard, terminate or restrict the bank…
This paper investigates two mechanisms of financial contagion that are, firstly, the correlated exposure of banks to the same source of risk, and secondly the direct exposure of banks in the interbank market. It will consider a random…
The global financial system can be represented as a large complex network in which banks, hedge funds and other financial institutions are interconnected to each other through visible and invisible financial linkages. Recently, a lot of…