Network Efficiency and the Banking System

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Inspired by the Coasean “market vs firm” dichotomy, we offer a new definition of efficiency by applying the notions of network cost and network efficiency as developed in complex network theory.

Network analysis is relevant for every system of interconnected exchanging agents. One such system is the banking sector. It is showed that the notions hereby presented may improve upon the predictions of Allen & Gale’s standard model, where agents exchange liquidity and where troubles in a local area of the network may lead to systemic collapse.