Contagion in the banking ecosystem: fractional order modelling

Abstract

This paper examines the dynamics of systemic risk within banking networks through the analysis of equilibrium points and associated stability conditions, using a fractional model to highlight the interactions between distressed and non-distressed banks. Equilibrium points are derived by solving a reduced system of fractional differential equations, accounting for both homogeneous and heterogeneous banking environments. Local and global stability analyses rigorously identify the conditions under which these equilibrium points exhibit stability or instability. Numerical simulations are employed to illustrate the systemic risk dynamics, complementing the theoretical insights. The results contribute to a deeper understanding of systemic financial risk and offer valuable implications for risk management and policy formulation in the banking sector.