Contagion and financial fragility in credit networks
Abstract Book of the XXIII IUPAP International Conference on Statistical Physics, Genova, Italy, (9-13 July 2007)Abstract
In modern financial systems, the presence of a wide variety of financial products, as different kinds of obligations, links the balance sheet of financial intermediaries and firms. A network structure naturally emerges in order to represent the complex structure of financial interdependencies: the nodes are banks and firms; the links represent the relationships of debt/credit. The network provide a robust-yet-fragile architecture for the economic system: on the one side the presence of multiple links and risk sharing allows to absorb small idiosyncratic shocks, on the other side the presence of linkage increases the probability of default of a node as a consequence of default of its neighbors, through domino effects.
Credit inter-linkages among agents are a source of bankruptcy diffusion: in fact, failure of fulfilling debt commitments would lead to bankruptcy chains. All in all, the bankruptcy in one sector can diffuse to other sectors through linkages creating a vicious cycle and bankruptcy avalanches in the network economy: main reasons are credit crisis, financial crisis, confidence crisis, reliance.
Even if a priori each firm/bank can interact with any firm/bank, real inter-banks, inter-firms and bank-firms networks discloses complex architecture: real economic networks appear to have the structure of scale-free networks . In many countries has been observed that inter-bank market presents a topology characterized by fat-tailed behavior of degree distribution). The same results appear considering firms relationships and banks-firms relationships.
Here we focus on properties of resilience of real credit networks. Moreover we study conditions to improve the stability of the whole system and to decrease the probabilit