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Evolution of controllability in interbank networks

The present economic downturn has revealed an unexpected com- plexity of financial markets and brought to the fore new questions both to scientists and regulators. Institutions of heterogeneous size get connected in complex networks of financial ties which play a major role for the spread of contagion. The current debate in reg- ulation focuses on how to identify systemically important financial institutions, as well as on how many and which institutions should be monitored by central banks. Recent works have shown that the dynamics of complex networks can be controlled by identifying the so-called driver nodes. Here we apply the notion of network con- trollability to the interbank market. We detect the institutions most crucial to the market’s functioning and study how the interbank controllability evolves over a span of 11 years, including the acute phase of the credit crisis in 2007-2009. We show that the fraction of ”driver” institutions in the network varies significantly with the time scale of focus for banking interactions (aggregated on a daily, weekly or monthly basis). In particular, we find a scale-free decay of the fraction of drivers with increasing time resolution, implying that regulations will likely have to be variable across time scales to be effective. Remarkably, we also find that drivers are often not the most highly connected ”hub” institutions, or the largest lenders, contrary to the expectations of many other analyses. Our findings contribute quantitative indicators which can support regulators in developing more effective supervision and intervention policies.

Reference: 
Scientific Reports 3 (2013)
Date of publication: 
2013
Authors: 
Delpini D.
Battiston S.
Riccaboni M.
Pammolli F.
Gabbi G.
Caldarelli G.