Authors: Periklis Gogas, Theophilos Papadimitriou, Maria Matthaiou

Title: Efficient Supervision of Banking Networks using the Threshold-Minimum Dominating Set (T-MDS): The case of Brazil

Abstract

Financial stability plays a key role in the economy as a whole. Minimization of a) the associated systemic risk and b) the domino effect in case of a banking crisis, are vital conditions to achieve sustainable growth. A close and detailed monitoring of the banking network can attain this goal. In this paper, we introduce the use of an auxiliary monitoring system competent to identify the smallest set of banks that can efficiently represent the whole banking system. Monitoring that set, the supervising authority, can promptly identify banks that are in distress and take the necessary measures to minimize the systemic risk. We employ tools from Complex Networks theory to examine the topology of the banking network which is defined by the interrelations between banking institutions. In doing so, we introduce the Threshold Minimum Dominating Set. We propose the use of this method as an auxiliary monitoring tool in the arsenal of a Central Bank. Our dataset includes 50 Brazilian banks and we examine a number of networks which are constructed based on various variables. The empirical results reveal that we can have an efficient supervision of the entire banking network, by monitoring a significantly smaller subset of banks.