Financial Contagion in a Core–Periphery Interbank Network

Peng Sui, Sailesh Tanna, Dandan Zhou

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Abstract

This paper studies financial contagion in a core-periphery interbank network where core banks are large in balance sheet size while periphery banks are smaller and link only with the core banks. Core banks are all bilaterally linked and intermediate liquidity for periphery banks. We establish analytic conditions under which financial contagion propagates in the core-periphery network and examine the extent to which heterogeneity associated with size and number of banks affects these conditions. We show that the failure of core banks does not necessarily imply contagious failure of periphery banks; the core-periphery network structure exhibits a ‘robust-yet-fragile’ tendency with increased size of core banks; and the resilience of the network to contagion depends on the number of core banks, the number of periphery banks, and the level of interbank liquidity intermediated between the core banks. We also find that, under certain conditions, the core-periphery network is more resilient than the complete network with increased size of core banks.
Original languageEnglish
Pages (from-to)691-710
Number of pages20
JournalThe European Journal of Finance
Volume26
Issue number7-8
Early online date20 Jun 2019
DOIs
Publication statusPublished - 3 Mar 2020

Bibliographical note

This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on20/06/2019, available online: http://www.tandfonline.com/10.1080/1351847X.2019.1630460

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.

Keywords

  • Banks
  • contagion
  • core-periphery
  • interbank network
  • systemic risk

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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