Network-based risk measurements for interbank systems

Abstract

This paper focuses on evaluating the systemic risk in interbank networks, proposing a series of measurements: risk distance, risk degree and m-order risk degree. The proposed measurements are formally proven to have good basic and extended properties that are able to reflect the effect of bank size, liability size, liability distribution, and the discount factor on the default risk, not only of a single bank, but also of the entire system. Additionally, the abovementioned properties and the relationship between risk distance and financial contagion indicate the rationality embodied in the proposed measurements. This paper also provides some implications on how to decrease or prevent the systemic risk in an interbank system.