ABM Example 2

Network-Based Systemic Risk

Banks connected through interbank lending network. Contagion spreads when defaults propagate through credit links.

NETWORK TOPOLOGY B1 healthy B2 healthy B3 shocked B4 healthy B5 contagion B6 contagion B7 risk credit shock contagion risk... MECHANISM: CONTAGION When B3 defaults (shocked): 1. B2 and B4 lose credit exposure to B3 → capital impaired 2. B6 is connected to B3 → defaults via direct loss 3. B5 and B7 face contagion risk through B6 failure 4. Cascade depends on: degree, capital ratios, shock size KEY PATTERN Systemic risk = f(network topology, capital buffers, correlated shocks)

MECHANISM

Contagion

Bank default propagates through interbank lending network. Each default increases counterparty losses, triggering cascading failures.

TOPOLOGY

Credit Network

Banks as nodes, credit lines as directed edges. Shock spreads from initially-hit bank to neighbors, then to second-order neighbors.

PARAMETERS

Amplification

  • loss_given_default — % of credit lost
  • default_threshold — capital ratio that triggers default
  • network_density — fraction of possible links present

OBSERVABLES

Crisis Metrics

  • num_defaults — count of failed banks
  • cascade_depth — hops from initial shock
  • systemic_loss — total capital destroyed