Cascading failures in bi-partite graphs: Model for systemic risk propagation

Xuqing Huang, Irena Vodenska, Shlomo Havlin, H. Eugene Stanley

Research output: Contribution to journalArticlepeer-review

182 Scopus citations

Abstract

As economic entities become increasingly interconnected, a shock in a financial network can provoke significant cascading failures throughout the system. To study the systemic risk of financial systems, we create a bi-partite banking network model composed of banks and bank assets and propose a cascading failure model to describe the risk propagation process during crises. We empirically test the model with 2007 US commercial banks balance sheet data and compare the model prediction of the failed banks with the real failed banks after 2007. We find that our model efficiently identifies a significant portion of the actual failed banks reported by Federal Deposit Insurance Corporation. The results suggest that this model could be useful for systemic risk stress testing for financial systems. The model also identifies that commercial rather than residential real estate assets are major culprits for the failure of over 350 US commercial banks during 2008-2011.

Original languageEnglish
Article number1219
JournalScientific Reports
Volume3
DOIs
StatePublished - 2013

Bibliographical note

Funding Information:
We wish to thank the European Commission FET Open Project ‘‘FOC’’ 255987 and ‘‘FOC-INCO’’ 297149, ONR (Grant N00014-09-1-0380, Grant N00014-12-1-0548), DTRA (Grant HDTRA-1-10-1-0014, Grant HDTRA-1-09-1-0035), NSF (Grant CMMI 1125290), the European EPIWORK, MULTIPLEX and LINC projects, DFG, the Next Generation Infrastructure (Bsik) and the Israel Science Foundation for financial support. Wharton Research Data Services (WRDS) was used in preparing the US Commercial Banks Balance Sheet Data. This service and the data available thereon constitute valuable intellectual property and trade secrets of WRDS and/or its third-party suppliers.

Funding

We wish to thank the European Commission FET Open Project ‘‘FOC’’ 255987 and ‘‘FOC-INCO’’ 297149, ONR (Grant N00014-09-1-0380, Grant N00014-12-1-0548), DTRA (Grant HDTRA-1-10-1-0014, Grant HDTRA-1-09-1-0035), NSF (Grant CMMI 1125290), the European EPIWORK, MULTIPLEX and LINC projects, DFG, the Next Generation Infrastructure (Bsik) and the Israel Science Foundation for financial support. Wharton Research Data Services (WRDS) was used in preparing the US Commercial Banks Balance Sheet Data. This service and the data available thereon constitute valuable intellectual property and trade secrets of WRDS and/or its third-party suppliers.

FundersFunder number
National Science FoundationCMMI 1125290
Office of Naval ResearchHDTRA-1-09-1-0035, N00014-09-1-0380, N00014-12-1-0548, HDTRA-1-10-1-0014
Directorate for Engineering1125290
European Commission255987, 297149
Deutsche Forschungsgemeinschaft
Israel Science Foundation

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