Hierarchical contagions in the interdependent financial network

We derive the default cascade model and fire-sale spillover in a unified interdependent framework. The interactions among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside banking system. Using data extracted from European Banking Authority, we present interdependency network composed of 48 21 asset classes. For robustness, employ three methods, called Anan, Hała Maxe, to reconstruct asset/liability cross-holding network. Then combine external portfolio holdings each bank compute matrix. is much denser than network, showing complex latent interaction banks. Finally, perform macroprudential stress tests for system, using adverse scenario EBA test as initial shock. different reconstructed networks, illustrate hierarchical cascades show that failure hierarchies are roughly same except few banks, reflecting overlapping accounts majority defaults. calculate systemic vulnerability individual vulnerability, which provide important information supervision relevant management actions.