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

Paper: arXiv 2603.09854

Authors: Soumen Majhi, Anna Mancini, Giulio Cimini

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.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 7.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a strong theoretical and statistical framework using statistical mechanics (ERGs) to reconstruct multi-layer financial-firm networks solely from balance sheet data. Its empirical application to the Italian economy demonstrates high practical utility for stress-testing systemic risk, bridging a critical data-gap gap in quantitative macro-finance.

Research Flowchart

  flowchart TD
    A[Research Goal: Assess Economic Resilience via Multilayer Bank-Firm Networks Without Granular Data] --> B[Data Inputs: Italian Bank & Firm Balance Sheet Data]
    B --> C[Method 1: Multilayer Network Reconstruction]
    C --> D[Method 2: Shock Propagation & Contagion Simulation]
    D --> E[Outcome 1: Identification of Systemic Firms/Industries & Vulnerable Banks]
    D --> F[Outcome 2: Scalable Digital Twin Framework for Network Stress Testing]