Financial Network Stability Under Shocks: Analysis and Reflections

Abstract

This study will explore the resilience and stability of financial networks under major shocks, which will be analyzed by reviewing the facts in situations such as the 2008 financial crisis and the research analysis of prominent scholars. One of the main results is that the types of financial networks most susceptible to contagious failures change dramatically as the magnitude or number of negative shocks exceeds a certain threshold. In particular, more financial connectivity is no longer a guarantee of stability. Conversely, interbank liabilities can fuel financial contagion and create a more vulnerable system in the event of a large shock. The results show that in large-scale shocks, “weakly connected” financial networks - for example, those consisting of a pair of connected banks that share a minimal amount of assets and liabilities with the rest of the system - are much more stable than more complete networks. This paper puts forward the consideration of financial network stability, which helps financial networks maintain stability in the face of potential financial shocks to a certain extent.