Evaluating systemic risk using bank default probabilities in financial networks

Sergio Rubens Stancato de Souza, Thiago Christiano Silva, Benjamin Miranda Tabak, Solange Maria Guerra
2016 Journal of Economic Dynamics and Control  
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more » ... ido parcialmente. Citizen Service Division Abstract The Working Papers should not be reported as representing the views of the Banco Central do Brasil. The views expressed in the papers are those of the authors and do not necessarily reflect those of the Banco Central do Brasil. In this paper, we propose a novel methodology to measure systemic risk in networks composed of financial institutions. Our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with default probabilities of institutions. We also present new heuristics for designing feasible and relevant stress-testing scenarios that can subside regulators in financial system surveillance tasks. We develop a methodology to extract banking communities and show that these communities are mostly composed of non-large banks and have a relevant effect on systemic risk. This finding renders these communities objects of interest for supervisory activities besides SIFIs and large banks. Finally, our results provide insights and guidelines that can be useful for policymaking.
doi:10.1016/j.jedc.2016.03.003 fatcat:6gc57ruxwfgkndyrdcv3libnre