Cooperative Mitigation of Contagion in Financial Networks

Since the beginning of the financial crisis in 2007-2008, several mitigation policies have been considered in order to monitor and stabilize the financial system in the event of a shock. In this paper, we examine the financial network of systemically important banks as a cooperative game. Governments can act as facilitators enforcing incentives for banks to cooperate and prevent the escalation of the financial crisis. To evaluate the characteristic function of the cooperative game, we develop clearing payment models for alternative coalitions competing in the market. As a fair division concept, we use nucleolus which implies a possible subsidizing pattern among the banks. For a demonstration, we use major European banks and a scenario which is linked to the adverse economic scenario used in 2016 EU-wide stress testing