Banking risk as an epidemiological model: an optimal control approach

TL;DR

This paper models banking contagion using epidemiological spread models and optimal control theory to analyze the impact of central bank measures on European banks' stability.

Contribution

It introduces a novel epidemiological differential equation model for banking contagion and applies optimal control to evaluate central bank interventions.

Findings

Model accurately describes European banking contagion.

Optimal control suggests effective central bank measures.

Simulations demonstrate scenario-based outcomes.

Abstract

The process of contagiousness spread modelling is well-known in epidemiology. However, the application of spread modelling to banking market is quite recent. In this work, we present a system of ordinary differential equations, simulating data from the largest European banks. Then, an optimal control problem is formulated in order to study the impact of a possible measure of the Central Bank in the economy. The proposed approach enables qualitative specifications of contagion in banking obtainment and an adequate analysis and prognosis within the financial sector development and macroeconomic as a whole. We show that our model describes well the reality of the largest European banks. Simulations were done using MATLAB and BOCOP optimal control solver, and the main results are taken for three distinct scenarios.