Title: Creating (parsimonious) banking networks
Authors: Ben Craig - Deutsch Bundesbank (Germany)
Dietmar Maringer - University of Basel (Switzerland)
Sandra Paterlini - European Business School Germany (Germany) [presenting]
Abstract: The level of interconnectedness of financial institutions and the network topology are central in determining the resilience of the system and the channels of shock propagation, as well as understanding how individual institutions take decisions and form links. Still, data are typically scarce and when available, only at an aggregate level. We introduce a simple yet effective decreasing marginal cost optimization model to estimate the interbank market network. By relying on an improved optimization algorithm from transport theory, we show that our model not only allows us to capture some stylized facts of the interbank networks, such as the core-periphery structure, but it also provides insights on the effect of the marginal distributions of assets and liabilities, as well as the consequences of potential heterogeneous preferences among banks.