Financial Networks in Metrics of Contagion: the Role of Interbank Panic

This paper examines the contagion effect in the interbank market depending on various factors: the architecture of financial network, the presence of an interbank panic, and the distribution of deposits. To analyze losses due to contagion, a new metric is used that calculates losses in the money supply. The work derives a “robust-efficiency” trade-off, according to which the higher the network’s ability to lend, the greater the losses the economy suffers during the crisis in the percentage terms. And based on the analysis of different types of financial networks, one of the possible characteristics of a network resistant to contagion is derived: a network segmented by bank assets, in each segment of which there are banks with a very similar amount of assets. Special attention is paid to the impact of interbank panic on network stability. It is shown that it is the panicked behavior of agents that leads to a possibility to find an internal optimum in the number of banks, which minimizes possible losses of the entire system during contagion. Finally, discussed is the need to take into account the degree of regulation of the network by the Central Bank when discussing their stability.