Symposium 2015

Virtual Library File - Interbank Exposure Networks

The Challenge

In the aftermath of the global financial crisis, most countries have seen a wave of new regulatory initiatives aimed at increasing financial stability and resilience. However, the implementation of re ...

In the aftermath of the global financial crisis, most countries have seen a wave of new regulatory initiatives aimed at increasing financial stability and resilience. However, the implementation of reforms is still in progress, and financial systems worldwide are far from being immune to another financial crisis.

The implementation of Basel III, for instance, leads to a gradual increase in capital requirements for banks, though many economists still consider these requirements as too low. Another envisioned goal, the partial separation of "traditional" and "hedge" banking, has not yet been achieved. We are also far away from a global harmonization of standards, best practices, and supervision. Moreover, there might even be the temptation to misjudge the partial implementation of regulatory reforms as finished. In fact, we might need more fundamental changes in the structure of the financial sector to prevent a future financial crisis.

This paper by Sam Langfield and Kimmo Soramäki reviews empirical research on the instability of complex interbank systems. Three network approaches are distinguished: descriptions of interbank exposure networks; simulation and modelling; and the development of new metrics to describe network topology and individual banks’ relative importance. The paper concludes by inferring policy implications and priorities for future research.