Impact of shadow banks on financial contagion

TL;DR

This paper introduces the ANWSER model to analyze how different network structures of shadow banks influence financial contagion severity, highlighting the systemic risk posed by shadow banking interconnections.

Contribution

It presents a novel asset network systemic risk model and examines three distinct interbank network topologies involving shadow banks and regulated banks.

Findings

Network topology significantly affects contagion severity.

Layered networks show different risk propagation patterns.

Asset-correlated networks influence systemic stability.

Abstract

An asset network systemic risk (ANWSER) model is presented to investigate the impact of how shadow banks are intermingled in a financial system on the severity of financial contagion. Particularly, the focus of this study is the impact of the following three representative topologies of an interbank loan network between shadow banks and regulated banks. (1) Random mixing network: shadow banks and regulated banks are intermingled randomly. (2) Asset-correlated mixing network: banks having bigger assets are a regulated bank and other banks are shadow banks. (3) Layered mixing network: banks in a shadow bank layer are connected to banks in a regulated bank layer with some interbank loans.