Modeling structure and credit risk of the economy: a multilayer bank-firm network approach

2026-03-10

AI Summary

This study addresses the challenge of assessing economic system resilience, which is often hindered by data privacy barriers that prevent access to the true structure of multilayer networks—such as supply chains, credit relationships, and interbank markets—necessary for analyzing risk propagation. The authors propose a unified framework that relies solely on balance sheet data from banks and firms, integrating advanced network reconstruction techniques with a multilayer contagion dynamics model to accurately infer the multiplex economic network comprising inter-firm supply links, bank-to-firm lending, and interbank exposures. Applying this approach to Italian economic data, the method effectively identifies systemically important firms, sectors, and vulnerable banks without requiring ground-truth network information. The identified drivers of systemic risk align with existing findings, offering a novel tool for digital-twin-based macroprudential stress testing.

Technology Category

• Game Theory and Economic Paradigms: Other Foundations of Game Theory & Economic Paradigms
• Multiagent Systems: Multiagent Systems under Uncertainty
• Data Mining & Knowledge Management: Graph Mining, Social Network Analysis & Community

Application Category

• Social Networks and Social Media: Social media analysis through the lenses of networks
• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Security and Privacy: Data transparency and provenance

Abstract

Assessing the resilience of the economy requires accounting for its intrinsic multi-layer nature, by assessing for instance how disruptions at the firm level spread through the production network and propagate to the banking sector. Methods exist to measure the reverberation of shocks over the multilayer network of supply-customer relations among firms, corporate loans of banks and their interbank market exposures. However, empirical network data are often privacy protected and thus inaccessible to researchers and regulators. In this work we develop an unified framework, combining state-of-the art techniques to reconstruct the whole multilayer structure of the economy from balance sheet information of banks and firms, as well as dynamics of shock propagation from the inter-firm to the interbank layers. We showcase application of our methodology using data of the Italian economy. We identify the most systemically important firms and industries, as well as the most vulnerable banks, further assessing the determinants of systemic risk -- obtaining results coherent with the empirical literature on network contagion. Overall, our framework allows performing detailed network-based stress tests on a digital twin of the economy, without requiring detailed network information that is difficult to acquire.

Problem

• multilayer network
• systemic risk
• economic resilience
• credit risk
• network reconstruction

Innovation

• multilayer network reconstruction
• systemic risk
• digital twin of the economy
• shock propagation
• balance sheet-based modeling