Assessing contagion risk in interbank networks requires combining structural measures with loss-based metrics that reflect how shocks propagate and translate into real economic harm. Foundational research by Franklin Allen Wharton School and Douglas Gale New York University Stern School of Business showed that network topology can both stabilize and amplify shocks, so regulators must read network shape as well as exposures to gauge vulnerability. Data limitations and reporting lags often make interpretation uncertain, but the right mix of metrics improves early warning.
Core network metrics
Degree and connectivity quantify how many counterparties a bank has and the density of links across the system; higher connectivity can diffuse small shocks but also create channels for large cascades. Concentration and core-periphery measures identify whether a few institutions dominate interbank flows, a pattern associated with fragility in the work of Sushil Gai Bank of England and Sujit Kapadia Bank of England on cascade dynamics. Centrality measures such as eigenvector and betweenness indicate nodes whose distress would disproportionately re-route liquidity and credit. Network clustering and path-length statistics reveal the potential for localized versus system-wide contagion. Topological measures are indispensable when exposures are bilateral and granular balance-sheet data are available.
Systemic stress and loss-based metrics
Loss-focused metrics translate network structure into expected economic damage. DebtRank developed by Stefano Battiston University of Zurich and collaborators assigns systemic impact scores that capture second-round effects through interbank claims, making it useful for ranking institutions by potential systemic loss. Stress-test losses and expected shortfall assess tail risk under scenarios; central banks and the International Monetary Fund use such metrics to set capital buffers and liquidity requirements. Simulation methods to quantify default cascades and shortfall propagation have been advanced in research by Andreas Upper Deutsche Bundesbank and peers, showing how shocks to one sector (for example, real estate) transmit through interbank exposures to households and firms.
Combining topological and loss-based metrics produces the best assessment: topology flags chokepoints and potential channels, while loss metrics estimate harm in monetary terms. Policymakers should integrate cross-border link data because contagion often transcends jurisdictions, affecting employment and credit access in territorially distant communities. Effective use of these metrics requires timely, high-quality exposure data and international regulatory cooperation to turn signal into preventive action.