An Analysis of Stability of Inter-bank Loan Network: A Simulated Network Approach

Abstract

Research in the domain of Financial Contagion has come to the forefront in recent years. There has been a significant focus on this field since the recession of 2008. In this paper we take a look at simulation based modelling to stress test the stability of inter-bank loan networks of different structures. We look to analyze the effect of various parameters on the stability of these networks. We first simulate networks which are Homogeneous in nature. We then simulate a Heterogeneous (tiered) network. The model also introduces an endogenous loaning mechanism to imitate a more realistic inter bank loan market. We run simulations on these networks to gain a better understanding of the propagation of losses through the network. After studying the results of these simulations we come up with some interesting new insights about how parameters like connectivity and size of the network, effect a tiered intra-bank financial network. One of our key findings is that higher inter-tier connectivity is good for the stability of big banks but not so much for banks of smaller size.