An Analysis of Residual Financial Contagion in Romania’s Banking Market for Mortgage Loans

Abstract

The uncertainty of the environment, the complexity of economic systems, both at the national and global economy levels, and the digital age and artificial intelligence draw attention to the existence or appearance of systemic, disruptive phenomena that can appear and propagate in different forms, producing effects that can turn into economic crises. These phenomena can be transmitted like a domino effect, and they are referred to as the contagion effect in the scientific literature. In this research, one of the four forms of financial contagion, known as residual contagion, is studied on the mortgage loan market in Romania using agent-based modeling. By considering the economic crisis of 2007–2009, also supported by the mortgage crisis, in the present paper, we aim to study the Romanian mortgage market in 2022 through the use of machine learning techniques and agent-based modeling. The purpose of this research is to capture the potential systemic risks that can outline a residual financial contagion effect. The simulation results highlight the fact that the degree of connectivity between the commercial banks in Romania and the way in which they are interconnected have a major importance in the emergence and propagation of contagion effects. The proposed approach and the obtained results can offer more insight to policymakers on how the contagion effect takes place within the banking sector.