Time: 1.00pm - 2.00pm
Venue: R407 (FMG Library), 4th Floor, Lionel Robbins Building.
Speaker: Iman van Lelyveld (Dutch Central Bank)
Seminar title: Early-warning signals of topological collapse in interbank networks
Abstract: The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single banks or banking systems. However, the interplay between financial distress and topological changes is still poorly understood. We build on earlier work where we analyzed interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, we found that many topological properties display an abrupt change in 2008, providing a clear - but unpredictable - signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We now apply this methodology to cross border interbank linkages using confidential data collected by the Bank for International Settlements. Our aim is to 1) confirm our earlier results and 2) extend the methodology to handle weighted networks.
