Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures

European Banking Center Discussion Paper Series No. 2014-011

CentER Discussion Paper Series No. 2014-057

TILEC Discussion Paper No. 2014-033

40 Pages Posted: 30 Sep 2014 Last revised: 13 Oct 2014

See all articles by Carlos León

Carlos León

Tilburg University - Center for Economic Research (CentER); Financial Network Analytics Ltd

Ron Berndsen

De Nederlandsche Bank

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2014

Abstract

An interacting network coupling financial institutions' multiplex (i.e. multi-layer) and financial market infrastructures' single-layer networks gives an accurate picture of a financial system’s true connective architecture. We examine and compare the main properties of Colombian multiplex and interacting financial networks. Coupling financial institutions' multiplex networks with financial market infrastructures' networks removes modularity, which enhances financial instability because the network then fails to isolate feedbacks and limit cascades while it retains its robust-yet-fragile features. Moreover, our analysis highlights the relevance of infrastructure-related systemic risk, corresponding to the effects caused by the improper functioning of FMIs or by FMIs acting as conduits for contagion.

Keywords: multiplex networks, interacting networks, financial stability, contagion, financial market infrastructures

JEL Classification: D85, D53, G20, L14

Suggested Citation

León, Carlos and Berndsen, Ron and Renneboog, Luc, Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures (September 29, 2014). European Banking Center Discussion Paper Series No. 2014-011, CentER Discussion Paper Series No. 2014-057, TILEC Discussion Paper No. 2014-033, Available at SSRN: https://ssrn.com/abstract=2502832 or http://dx.doi.org/10.2139/ssrn.2502832

Carlos León (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Financial Network Analytics Ltd ( email )

London
United Kingdom

Ron Berndsen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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