Mutual credit relations between banks can destabilize the financial system, as the 2007-08 crisis laid bare. Researchers at the Complexity Science Hub have developed a new model showing that supply chain disruptions sharply exacerbate this systemic risk.
Naval blockades such as in the Strait of Hormuz, trade wars, pandemics: events like these can trigger global supply chain crises. The repercussions are not limited to the real economy, but spill over into the banking sector when companies are unable to repay their loans, threatening the stability of the financial system. A new model developed by the Complexity Science Hub (CSH) illustrates just how severe this can be. The framework considers the mutual credit relationships between banks on the interbank market, through which banks lend and borrow money from one another.
The model allows researchers to quantify how chain reactions in supply networks in turn amplify chain reactions in the banking sector. "A large-scale supply chain crisis amplifies bank losses through credit interconnections on the interbank market by 70%," reports CSH researcher Jan Fialkowski , lead author of the study , recently published in the Journal of Economic Dynamics and Control. "We were also able to show that the interplay of the two chain reactions makes extreme financial losses significantly more likely."
"The findings suggest that conventional models which do not account for the interbank market substantially underestimate the consequences of supply chain crises for financial stability," says Stefan Thurner , a study author and president of the CSH.
Interaction of Two Chain Reactions
The interbank market is central to the modeling of financial systemic risk. Banks are bound together through networks of mutual credit exposure: when one institution suffers losses severe enough to prevent it from repaying its obligations, the lending bank incurs losses in turn. "We call this chain reaction 'interbank contagion'," said Fialkowski. "It can destabilize large parts of the financial sector and was a key driver of the 2007/2008 financial crisis."
That, however, is only one side of the equation. In the real economy, firms are linked through supply relationships. When one or more links in those chains break — through shortages, production failures or insolvencies — economic damage can propagate through the supply network like a shockwave. Such a scenario is now a live possibility given the blockade of the Strait of Hormuz.
A Data-Driven, Two-Layer Model
In 2024, CSH researchers demonstrated that this "supply chain contagion" can raise banks' credit risk far beyond what conventional models would predict. "That work made clear that supply chain dynamics ought to be incorporated into credit risk models," said Fialkowski. "But the risks arising from the interbank market were absent from the 2024 model." The new study addresses that gap, enabling researchers to assess risks to the financial system as a whole rather than focusing narrowly on individual firm-bank relationships.
The model is based on a comprehensive Hungarian dataset encompassing more than 240,000 companies, 19 banks, over 1.1 million supply chain links, and more than 40,000 bank-firm loans. "Unlike Austria and many other countries, Hungary has this data available at the level of individual companies and banks, allowing us to reconstruct supply chains and credit relationships with near-exact precision," says Fialkowski. "Our model is fully data-driven — meaning it is largely determined by the real-world relationships," the physicist adds.
In a first step, the researchers simulated bank losses in the context of a supply chain crisis by letting individual firms within the model fail. The economic damage from each failure spreads across the entire supply chain network through which firms are interconnected (supply chain contagion). "We then examined which banks the affected firms had loans with — and which other banks those banks in turn owed money to," explains Fialkowski. The result: the systemic risk emanating from individual firms is amplified on average by 12% and by up to 28% through interbank contagion.
Stress Tests with 1,001 Simulated Covid-19 Shock Scenarios
In large-scale economic shocks — such as those following a pandemic, a war, or a flood disaster — supply chain contagion originates from many firms simultaneously. To understand how strongly this supply chain contagion in turn amplifies interbank contagion, the researchers simulated 1,001 Covid scenarios.
One of the simulations replicates the actual production drops experienced by affected Hungarian firms during the first quarter of 2020. "In the other 1,000 simulations, the affected firms vary, but otherwise each simulation mirrors the real Covid shock at the level of different industry sectors. The 1,001 simulations allowed us to quantify in a statistically robust manner how strongly a supply chain crisis amplifies losses on the interbank market," says Fialkowski. A severe effect became apparent: supply chain contagion amplifies losses from interbank contagion by 70%.
"What surprised us most — and is particularly significant for national economies — is that the interaction between the two contagion channels does not merely shift average financial losses; it transforms the entire risk structure," says Thurner. Extreme loss scenarios, so-called "fat tails", are substantially amplified by supply chain contagion.
Better Risk Assessment and Crisis Response
The study emphasizes that financial risk models must account for the non-linear interactions between both contagion channels, i.e., chain reactions in supply networks and on the interbank market. Failure to do so can result in a stark underestimation of risk.
"Supply chains and the banking sector are complex, interconnected systems. It is important to be able to realistically assess financial risk arising from supply chain dynamics, into which banks typically have limited insight," emphasizes Fialkowski.
"During the pandemic, a major financial crash was averted because the economic crisis was absorbed at enormous financial cost," says Fialkowski. "If you understand the key factors contributing to financial risk, you can assess the actual risk more accurately and make stabilizing measures and preventive action more efficient and better targeted. We have taken another step forward," adds Thurner.
About the study
The study " A data-driven econo-financial stress-testing framework to estimate the effect of supply chain networks on financial systemic risk ", by J. Fialkowski, C. Diem, A. Borsos and S. Thurner, was published in Journal of Economic Dynamics & Control (doi: 10.1016/j.jedc.2026.105333).
About the Complexity Science Hub
The Complexity Science Hub (CSH) is Europe's research center for the study of complex systems. We derive meaning from data from a range of disciplines – economics, medicine, ecology, and the social sciences – as a basis for actionable solutions for a better world.
CSH members are Austrian Institute of Technology (AIT), BOKU University, Central European University (CEU), Graz University of Technology, Interdisciplinary Transformation University Austria (IT:U), Medical University of Vienna, TU Wien, University of Continuing Education Krems, Vetmeduni Vienna, Vienna University of Economics and Business, and Austrian Economic Chambers (WKO).
