Measurement and Internalization of Systemic Risk in a Global Banking Network

TL;DR

This paper introduces a novel method combining epidemic modeling and game theory to evaluate and allocate systemic risk across countries in the global banking network, aiding better regulation.

Contribution

It proposes a new approach to measure and distribute systemic risk using a SIR epidemic model and Shapley value, based on real-world banking data.

Findings

Identifies key systemic risk contributors across countries.

Demonstrates the effectiveness of the epidemic model in risk assessment.

Provides insights into the network features influencing systemic risk.

Abstract

The negative externalities from an individual bank failure to the whole system can be huge. One of the key purposes of bank regulation is to internalize the social costs of potential bank failures via capital charges. This study proposes a method to evaluate and allocate the systemic risk to different countries/regions using a SIR type of epidemic spreading model and the Shapley value in game theory. The paper also explores features of a constructed bank network using real globe-wide banking data.