Graph Data Reveals the Systemic Risk of Financial Institutions during 2008-2010
A new published research paper, DebtRank: Too Central to Fail? Financial Networks, the FED and Systemic Risk : Scientific Reports : Nature Publishing Group, introduces DebtRank, a system that analyzes a new and unique dataset on the USD 1.2 trillion FED emergency loans program to global financial institutions during 2008–2010.
The authors find that a group of 22 institutions, which received most of the funds, form a strongly connected graph where each of the nodes becomes systemically important at the peak of the crisis. The default of each one would have a larger economic impact on the whole network. Even small, dispersed shocks to individual banks could thus have triggered the default of a large portion of the system. The authors note that because the network of impact used in the study is a proxy of the real, unknown network, the findings should be regarded with caution, but the study shows the kinds of insights that can be gained using DebtRank.