Modelling Interconnections in the Global Financial System in the Light of Systemic Risk

In this paper, we focus on the link between systemic risk and sovereign crises. We model how state support may influence a distressed financial system on an agent-based network model calibrated to 4Q 2011 data collected from several sources. Our model contributes methodologically to agent-based modelling of banking networks’ systemic stability by adding the sovereign sector and the mechanisms of risk transfer between the banks and the sovereigns when state aid is initiated. The model implements two types of state support to banks, bailouts and asset relief. We show that these two have different effect on systemic stability, but both mitigate the systemic crisis in the short run. How the state aid measures are efficient in the long run depends on the model’s parameterization.