We propose to test the assumption that interconnections across financial institutions can be explained by a diversification motive. This idea stems from the empirical evidence of existence of long-term exposures that cannot be explained by a liquidity motive (maturity or currency mismatch). We model endogenous interconnections of heterogenous financial institutions facing regulatory constraints using a maximization of their expected utility. Both theoretical and simulationbased results are compared to a stylized genuine financial network. The diversification motive appears to plausibly explain interconnections among key players. Using our model, the impact of regulation on interconnections between major banks -currently discussed at the Basel Committee on Banking Supervision is analyzed.
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Diversification and Endogenous Financial Networks.pdf

Mots clés
Financial networks, Natural disasters, Regulation, Solvency, Systemic risk