Financial contagion in the interbank market

Financial networks have been extensively studied in view of their importance to the world economy. In particular, the stability of the interbank market is the cornerstone for the prevention of financial crises, such as the one in 2007 when the bankruptcy of an initially small sector ended up collapsing the entire system. In this paper we will analyze the stability of interbank networks in terms of their connectivity, using the Gai and Kapadia model in which all banks are of the same size [Proc. Royal Soc. London A, 466, pp. 2401–2423 (2010)]. The objective is to perform an in-depth study, analyzing the dependence on the contagion probability and the contagion extend on the model parameters as well as on the network topology. Furthermore we extend the model to incorporate the diversity present in realistic financial networks and to account for external bank investments in private companies.