Network Topology, System Mechanics and Behavioral Dynamics in Interbank Payment Systems

Kimmo Soramäki

Research output: ThesisDoctoral ThesisCollection of Articles

Abstract

The financial crisis of 2007-09 showed that financial institutions are highly interconnected and that the dynamic behavior of complex financial systems is hard to foresee. This Dissertation applies and develops new quantitative methods that describe the interbank payment functions of the financial system, both during normal circumstances and during times of crisis. First, it describes the topology of interactions among financial institutions using methods developed in network theory. Using empirical analysis of transaction data from the Fedwire interbank payment system of the Federal Reserve, it finds that the payment networks are complex with scale-free degree distributions and contain core banks that process a very high proportion of the total value. Second, it develops simulation models of the interbank payment systems and provides approximations of their liquidity flow mechanics. The simulation models are used to evaluate the efficiency and safety of alternative system designs. Third, it proposes an agent-based model of the interbank payment system and derives a liquidity demand function for it. The model is also used to forecast the collective behavior of banks when mechanisms that allow them to save liquidity are introduced to the system.
Translated title of the contributionPankkien välisten maksujärjestelmien verkostotopologia, toimintamekaniikka ja käyttäytymisdynamiikka
Original languageEnglish
QualificationDoctor's degree
Awarding Institution
  • Aalto University
Supervisors/Advisors
  • Salo, Ahti, Supervising Professor
  • Salo, Ahti, Thesis Advisor
Publisher
Print ISBNs978-952-60-4652-5
Electronic ISBNs978-952-60-4653-2
Publication statusPublished - 2012
MoE publication typeG5 Doctoral dissertation (article)

Keywords

  • network theory
  • complexity
  • interbank payment system
  • liquidity
  • financial stability
  • counterfactual simulations
  • agent-based modeling

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