Early-warning signals of topological collapse in interbank networks

On March 13th, I went to a Studium Generale lecture by Diego Garlaschelli. The main part of his presentation was on this paper Early-warning signals of topological collapse in interbank networks (2013) by Tiziano Squartini, Iman van Lelyveld (DNB), and Diego Garlaschelli in Scientific Reports 3 (3357).

They looked at about 110 Dutch banks and their interconnections from 1998 – 2008. There seems to be no pattern in number of banks over time (black) or vertices (connections, grey).


So no evidence of signals for the crisis? They looked deeper, at the network structure.

First, comparing actual network versus a random network where only the number of connections is kept constant (difference between real and random network is expressed as a z-score). result: abrupt change in z-score (purple lines, left panel in tweet below).

However, accounting for (in random network) the fact that large banks have more links than small banks results in continuous transition (blue line, right side)

One step further, is also incorporating triad (triangle) structures in the random network (green lines). Most of the 14 possible triad configuration do not show a pattern. However, one of the riskiest (motif number 9, the unreciprocated 3-loop, where A loans to B, B loans to C, and C loans to A; a debt loop) does show a pattern (see also Figure 6 in the paper)

Concluding slide:

Policy conclusion in the paper:

More generally, any policy directed at regulating interbank markets in a ‘pairwise’ fashion appears to be fundamentally ineffective, since the most significant patterns are found to occur at an irreducibly triadic level. This result moves the regulation target even further away: while the notion of systemic risk already implies that monitoring individual banks is insufficient to contain systemic risk, monitoring pairs of banks is also likely to fail; the minimal ‘building blocks’ appear to be triples of banks.

As to further research/predicting the next crisis:



Een gedachte over “Early-warning signals of topological collapse in interbank networks

  1. Pingback: Week van Wilte in Tweets #13 – wilte

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