Systemic Risk in Financial Networks: A Survey

TL;DR

This survey reviews the complex relationship between financial networks and systemic risk, categorizing different risk types, measurement methods, and regulatory strategies to better understand and mitigate financial crises.

Contribution

It provides a comprehensive taxonomy of systemic risk types, discusses measurement techniques, and explores regulatory and network dynamics in financial systems.

Findings

Different types of systemic risk are categorized and explained.

Measurement methods for systemic risk are discussed.

Implications for regulation and financial stability are analyzed.

Abstract

We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios and firesales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks' regarding their portfolios and partnerships, and the changing nature of financial networks.