DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk

Systemic risk, here meant as the risk of default of a large portion of the financial system, depends on the network of financial exposures among institutions. However, there is no widely accepted methodology to determine the systemically important nodes in a network. To fill this gap, we introduce,...

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Bibliographic Details
Published inScientific reports Vol. 2; no. 1; p. 541
Main Authors Battiston, Stefano, Puliga, Michelangelo, Kaushik, Rahul, Tasca, Paolo, Caldarelli, Guido
Format Journal Article
LanguageEnglish
Published London Nature Publishing Group UK 02.08.2012
Nature Publishing Group
Subjects
639/766/25
639/766/483/640
639/766/530
Banking industry
Feedback
Humanities and Social Sciences
Institutions
International finance
multidisciplinary
Nodes
Science
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Summary:Systemic risk, here meant as the risk of default of a large portion of the financial system, depends on the network of financial exposures among institutions. However, there is no widely accepted methodology to determine the systemically important nodes in a network. To fill this gap, we introduce, DebtRank, a novel measure of systemic impact inspired by feedback-centrality. As an application, we analyse a new and unique dataset on the USD 1.2 trillion FED emergency loans program to global financial institutions during 2008–2010. We find that a group of 22 institutions, which received most of the funds, form a strongly connected graph where each of the nodes becomes systemically important at the peak of the crisis. Moreover, a systemic default could have been triggered even by small dispersed shocks. The results suggest that the debate on too-big-to-fail institutions should include the even more serious issue of too-central-to-fail.
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ISSN:2045-2322
2045-2322
DOI:10.1038/srep00541