Network Theory and Financial Risk
First published:
ISBN: 9781782722199
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Liquidity and Operational Risk: Interbank Payment Networks
Introduction to Financial Networks
Creating and Describing Networks
Identifying Important Nodes: Centrality Metrics
Uncovering Latent Structure: Clustering and Community Detection
Finding Hidden Links: Projection Networks
Fast Insights: Visualising Networks
Financial Cartography: Network Layouts
Brass Tacks: Complexity Reduction
Market Risk: Asset Correlation Networks
Liquidity and Operational Risk: Interbank Payment Networks
Counterparty and Systemic Risk: Exposure Networks
Interbank payment systems are networks where the nodes are banks or other financial institutions and links represent payments made from one institution to another. Interbank payment and settlement systems provide the backbone for all financial transactions. This chapter will cover the analysis of payment systems, focusing on simulation. It will provide detailed examples of analysing and summarising payment systems, performing simulations on payments data, and generating realistic networks and payment distributions as input to simulations when actual payments data are not available. Simulation output can be combined with network-based centrality metrics for further analysis.
Systemic risk in payment systems has been studied since Humphrey (1986), who found significant risk in the US Fedwire system in the mid-1980s. Subsequent studies by Angelini, Maresca and Russo (1996), Bech and Soramäki (2002) and Galos and Soramäki (2005) found the risks to be limited. Since then, however, most payment systems have switched from net settlement to real-time gross settlement (RTGS; Bech, Preisig and Soramäki, 2008), transforming credit risk into liquidity risk as gross settlement eliminates the
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