Header

UZH-Logo

Maintenance Infos

DebtRank and the network of leverage


Battiston, Stefano; D'Errico, Marco; Gurciullo, Stefano (2016). DebtRank and the network of leverage. The Journal of Alternative Investments, 18(4):68-81.

Abstract

The interconnectedness of the financial system is one of the main factors contributing to systemic risk. The financial crisis has shown how the network of intrafinancial exposures may, in times of systemic distress, amplify initially small shocks. In this work, the authors build on the DebtRank methodology by introducing the notion of a network of leverage and propose a two-round stress test exercise. In the first round, a shock hits banks’ external assets; in the second round, these initial losses reverberate in the network of interbank exposures because of the devaluation of interbank obligations. Losses in the second round result from a multiplicative effect between external and interbank leverage. The authors then apply the stress test to the largest EU banks for the years 2008–2013. They find that second-round losses are at least as large as first-round losses; neglecting these effects could therefore lead to a severe underestimation of systemic risk.

Abstract

The interconnectedness of the financial system is one of the main factors contributing to systemic risk. The financial crisis has shown how the network of intrafinancial exposures may, in times of systemic distress, amplify initially small shocks. In this work, the authors build on the DebtRank methodology by introducing the notion of a network of leverage and propose a two-round stress test exercise. In the first round, a shock hits banks’ external assets; in the second round, these initial losses reverberate in the network of interbank exposures because of the devaluation of interbank obligations. Losses in the second round result from a multiplicative effect between external and interbank leverage. The authors then apply the stress test to the largest EU banks for the years 2008–2013. They find that second-round losses are at least as large as first-round losses; neglecting these effects could therefore lead to a severe underestimation of systemic risk.

Statistics

Citations

Altmetrics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:13 Apr 2016 17:43
Last Modified:08 Dec 2017 19:21
Publisher:Institutional Investor, Inc.
ISSN:1520-3255
Publisher DOI:https://doi.org/10.3905/jai.2016.18.4.068
Related URLs:http://journals.sfu.ca/iij/index.php/JAI/article/view/3463 (Publisher)
Other Identification Number:merlin-id:13174

Download

Full text not available from this repository.
View at publisher