RT Journal Article SR Electronic T1 DebtRank and the Network of Leverage JF The Journal of Private Equity FD Institutional Investor Journals SP 58 OP 71 DO 10.3905/jpe.2016.20.1.058 VO 20 IS 1 A1 Stefano Battiston A1 Marco D’Errico A1 Stefano Gurciullo YR 2016 UL https://pm-research.com/content/20/1/58.abstract AB The interconnectedness of the financial system is one of the main factors contributing to systemic risk. The financial crisis has shown how the network of intrafinancial exposures may, in times of systemic distress, amplify initially small shocks. In this work, the authors build on the DebtRank methodology by introducing the notion of a network of leverage and propose a two-round stress test exercise. In the first round, a shock hits banks’ external assets; in the second round, these initial losses reverberate in the network of interbank exposures because of the devaluation of interbank obligations. Losses in the second round result from a multiplicative effect between external and interbank leverage. The authors then apply the stress test to the largest E.U. banks for the years 2008–2013. They find that second-round losses are at least as large as first-round losses; neglecting these effects could therefore lead to a severe underestimation of systemic risk.TOPICS: Private equity, financial crises and financial market history, developed, statistical methods