🏦 Interbank Networks and Financial Contagion

About this simulation

Banks do not just lend to households and firms — they lend heavily to each other, through overnight interbank loans, repo agreements and derivatives exposures. This creates a dense web of mutual claims. When one bank fails, it cannot repay what it owes to its interbank lenders. Those lenders take a loss on that exposure; if the loss is large enough relative to their own capital buffer, they too become insolvent and stop paying their own creditors — and the failure cascades outward across the network. This is financial contagion, one of the central concerns of systemic-risk regulation since the 2008 crisis.

How it works

• Each bank node has a simulated capital buffer (equity as a % of assets) and is linked to other banks by weighted lending-exposure edges.
• When a bank defaults, each of its interbank creditors loses loss-given-default × exposure size from its own capital.
• If a creditor's cumulative losses exceed its capital buffer, it also defaults — triggering the next round of contagion.
• Denser networks and thinner capital buffers make cascades more likely to spread network-wide; sparser networks and thicker buffers tend to contain the shock locally.
• The optional bailout switch caps cascades once failures cross a "too big to fail" threshold, capturing how regulators intervene to stop systemic collapse.

Controls

• Banks — number of institutions in the simulated network.
• Interconnectedness — how densely banks lend to one another.
• Capital buffer — average equity cushion banks hold against losses.
• Loss given default — the fraction of an exposure that is unrecoverable when a counterparty fails.
• Bailout switch — stops the cascade once a systemic share of the network has failed.
• 💥 Trigger random default — fails a random bank and lets contagion propagate; you can also click any bank directly.

Did you know?

After Lehman Brothers' collapse in 2008 froze interbank lending worldwide, regulators introduced capital surcharges for "systemically important" banks and stress tests that explicitly model contagion through interbank exposure networks — the same mechanism this simulation reproduces in miniature.