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Shock Propagation in the Banking System with Real Economy Feedback

Tuesday, February 25, 2020, 1:30 pm – 2:30 pm

ABSTRACT / The main objective of this research project is to model the financial stability of an economy in a microsimulation based framework which is suitable to capture contagious mechanisms in an interconnected system of economic networks. Our modeling framework consists of four modeling blocks: (i) contagion in the banking sector, (ii) modeling credit supply shocks for firms, (iii) assessing the amplification of these shocks in the production network and (iv) estimating banks' losses on their corporate loan portfolios. In the first block we built a banking system contagion model with channels for interbank losses, liquidity hoarding and fire sales effects, however, it also incorporates several balance sheet adjustment mechanisms to take into account the realistic behavior of banks in a stress scenario. The other three blocks of the model are treated together in a spatial econometric model which gives estimates for the probability of default on corporate loan contracts. As a first step towards application we embedded this framework in the liquidity stress test of the Hungarian Central Bank. Early results of the simulations indicate that in the Hungarian banking system the magnitude of feedback-based losses coming from the firm network are similar or even more severe than the losses caused by the usual firesales and interbank contagion channels. Besides stress testing, future applications of our framework will focus primarily on SIFI identification and the optimization of the macroprudential policy mix.

BIO / András is a Ph.D. candidate at the Department of Network and Data Science with a particular interest in economic networks. He is also affiliated with the Central Bank of Hungary, where he works as an applied researcher focusing on financial stability. In his PhD thesis, András is conducting research on modeling contagious mechanisms of complex economic systems and designing regulations to prevent instabilities in the economy.