Efficient immunization strategies to prevent financial contagion

TL;DR

This paper introduces efficient immunization strategies for financial networks to prevent contagion, focusing on minimizing systemic risk while considering side effects like de-diversification.

Contribution

It proposes a novel counteractive immunization strategy that reduces systemic risk without increasing individual bank risk, addressing limitations of uniform immunization.

Findings

Counteractive immunization effectively reduces systemic risk.

Uniform immunization decreases individual risk but may increase systemic risk.

Counteractive approach avoids de-diversification side effects.

Abstract

Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this study, we propose efficient immunization strategies to prevent a default contagion that might occur in a financial network. An essential difference from the previous studies on immunization strategy is that we take into account the possibility of serious side effects. Uniform immunization refers to a situation in which banks are "vaccinated" with a common low-risk asset. The riskiness of immunized banks will decrease significantly, but the level of systemic risk may increase due to the de-diversification effect. To overcome this side effect, we propose another immunization strategy, counteractive immunization, which prevents pairs of banks from failing simultaneously. We find that counteractive immunization can efficiently reduce systemic risk without altering the riskiness of individual banks.