Managing Default Contagion In Inhomogeneous Financial Networks
The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. Our results allow us to determine the impact of local shocks to the entire system and the wider economy. As a central application, we characterize resilient and non-resilient cases. In particular, for the prominent case where the network has a degree sequence without second moment, we show that a small number of initially defaulted banks can trigger a substantial default cascade. Paralleling regulatory discussions, we determine minimal capital requirements for financial institutions sufficient to make the network resilient to small shocks. It is joint work with Thilo Meyer-Brandis, Konstantinos Panagiotou and Daniel Ritter (all University of Munich)