DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk

by Sabrina I. Pacifici on August 9, 2012

DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk. Stefano Battiston, Michelangelo Puliga, Rahul Kaushik, Paolo Tasca and Guido Caldarelli, August 2, 2012

  • “Systemic risk, here meant as the risk of default of a large portion of the financial system, depends on the network of financial exposures among institutions. However, there is no widely accepted methodology to determine the systemically important nodes in a network. To fill this gap, we introduce, DebtRank, a novel measure of systemic impact inspired by feedback-centrality. As an application, we analyse a new and unique dataset on the USD 1.2 trillion FED emergency loans program to global financial institutions during 2008–2010. We find that a group of 22 institutions, which received most of the funds, form a strongly connected graph where each of the nodes becomes systemically important at the peak of the crisis. Moreover, a systemic default could have been triggered even by small dispersed shocks. The results suggest that the debate on too-big-to-fail institutions should include the even more serious issue of too-central-to-fail.”
  • See also: How Google Can Avert the Next Financial Crisis, by Mark Buchanan and postings on financial system
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