Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73997
Authors: 
Babus, Ana
Year of Publication: 
2007
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 69.2007
Abstract: 
Modern banking systems are highly interconnected. Despite their various benefits, the linkages that exist between banks carry the risk of contagion. In this paper we investigate how banks decide on direct balance sheet linkages and the implications for contagion risk. In particular, we model a network formation process in the banking system. Banks form links order to reduce the risk of contagion. The network is formed endogenously and serves as an insurance mechanism. We show that banks manage to form networks that are resilient to contagion. Thus, in an equilibrium network, the probability of contagion is virtually 0.
Subjects: 
Financial Stability
Network Formation
Contagion Risk
JEL: 
C70
G21
Document Type: 
Working Paper

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