Asset Contagion as a Source of Systemic Risk in Banking Networks
This event is part of the Departmental Seminars.
Committee: H. Eugene Stanley, Irena Vodenska, Kevin Black, Bill Klein, Manher Jariwala
We study the European banking system by constructing a bipartite network of banks and assets, observing that the banks form a core-periphery structure with strong regional bias. We model how common exposures, for example portfolio overlap, influence shock propagation through the banking system. We show that the system as currently regulated is robust to exogenous shocks as long as market participants are rational. However, the current framework fails to protect the banking network from big losses if market participants become risk-averse. In fact, the system undergoes a phase transition in which the perceived asset risk is the critical parameter.