DebtRank-transparency: Controlling systemic risk in financial networks
Open Access
- 28 May 2013
- journal article
- research article
- Published by Springer Science and Business Media LLC in Scientific Reports
- Vol. 3 (1), srep01888
- https://doi.org/10.1038/srep01888
Abstract
Nodes in a financial network, such as banks, cannot assess the true risks associated with lending to other nodes in the network, unless they have full information on the riskiness of all other nodes. These risks can be estimated by using network metrics (as DebtRank) of the interbank liability network. With a simple agent based model we show that systemic risk in financial networks can be drastically reduced by increasing transparency, i.e. making the DebtRank of individual banks visible to others, and by imposing a rule, that reduces interbank borrowing from systemically risky nodes. This scheme does not reduce the efficiency of the financial network, but fosters a more homogeneous risk-distribution within the system in a self-organized critical way. The reduction of systemic risk is due to a massive reduction of cascading failures in the transparent system. A regulation-policy implementation of the proposed scheme is discussed.Keywords
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