Dynamic Bailout Model for Risk Contagion in Interbank Networks

Banks establish interconnected networks through interbank lending activities. While these network connections strengthen interbank relationships, they also create channels for risk contagion. As risks propagate within the interbank lending network, it becomes imperative for the government to implement controls and provide bailouts promptly to address the contagion. However, existing research on bailout strategies predominantly focuses on static environments and often neglects the dynamic changes that occur during the contagion process. In response, this paper proposes a government bailout model tailored specifically for dynamic risk contagion processes. Utilizing a greedy algorithm, the model transforms the dynamic bailout problem into a static multi-objective optimization problem. Upon detecting contagion risk and determining the necessity for external assistance, the model can generate an optimal bailout plan that addresses both the minimization of bailout funds and systemic risk. Finally, empirical experiments conducted on a real-world contagion bailout scenario validate the effectiveness and superiority of the proposed model.