TY  - JOUR
AU  - Acemoglu,Daron
AU  - Ozdaglar,Asuman
AU  - Tahbaz-Salehi,Alireza
TI  - Systemic Risk and Stability in Financial Networks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18727
PY  - 2013
Y2  - January 2013
UR  - http://www.nber.org/papers/w18727
L1  - http://www.nber.org/papers/w18727.pdf
N1  - Author contact info:
Daron Acemoglu
Department of Economics
MIT, E52-380B
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/253-1927
Fax: 617/253-1330
E-Mail: daron@mit.edu

Asuman Ozdaglar
Dept of Electrical Engineering
and Computer Science
Massachusetts Institute of Technology
77 Massachusetts Ave, E40-130
Cambridge, MA 02139
E-Mail: asuman@mit.edu

Alireza Tahbaz-Salehi
Columbia Business School
3022 Broadway, 418 Uris Hall
New York, NY 10027
E-Mail: alirezat@columbia.edu
AB  - We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more “complete” interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.
ER  -