How to measure interconnectedness in the financial system using Graph Theory? Review and application of the indicators of interconnectedness for the cross-border exposures between 2011 and 2020.

Details

Supervisors

Olieslagers, Ruben

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

The events following the collapse of Lehman Brothers in 2008 highlighted the multiple connections that exist between financial institutions. It has challenged the understanding of financial actors and banking supervisors of the risks arising from these connections. Interconnectedness became a subject of interest in the financial literature. In particular, the Graph Theory allows to map the interconnections between financial institutions. After a review of the different measures applied in Graph Theory, we will assess the relevant measures for the cross-border claims network. Then, we will simulate the transmission of a shock to the network between 2011 and 2020. The measures will also be compared to assess their relevance. This will lead to the conclusion that interconnectedness should not be only defined by the size of the exposures but also by the fragility of the structure that these interconnections generate.