Systemic Risk and Identification of Systemically Important Financial Institutions

A highly interconnected financial network threatens the stability of the financial system with contagion risk. In this paper, we will focus on the relationship between the architecture of the financial network and the impact of the bankruptcy of financial institutions on the system. From the definition of systemic risk to the approaches to its regulation we will get to the characteristics of complex networks. The interbank payment system will be constructed from individual bank level by adding links to other banks, where the interconnections are formed through debt contracts; the result is then a model interbank network. It will be followed by studying various theoretical and empirical interbank network topologies and a description of the processes that run through them. The failure of a bank may establish a cascade failure of other banks associated with it. We will study the evolution from the idiosyncratic shock to financial contagion pervading the whole system. Knowledge of the stability and resilience of financial networks is also crucial for the regulator, so we will theoretically analyze the situation in different modes of shocks. We will also introduce an indicator of systemically important institutions SinkRank, and with simulated data verify its validity for surveillance on the Czech interbank market. The last finding will be the verification of whether higher capital leads to fewer failures and higher exposure to more failure.