Banks and Their Contagion Potential: How Stable Is Banking System? Mitja Steinbacher, Matjaz Steinbacher, and Matej Steinbacher Abstract We measure contagion potential and stability of banking system on a randomized version of the credit contagion model by Steinbacher M, Steinbacher M, Steinbacher M (2012) Credit contagion in financial markets: a network-based approach. Available via SSRN. http://papers.ssrn.com/sol3/papers.cfm?abstract id= 2068716. Cited 30 Jan 2013. We introduce two estimators of the contagion potential of banks (liquidity-loss potential and ˛-criticality index (Steinbacher M, Steinbacher M, Steinbacher M (2012) Credit contagion in financial markets: a network-based approach. Available via SSRN. http://papers.ssrn.com/sol3/papers. cfm?abstract id=2068716. Cited 30 Jan 2013)) and introduce Shannon’s entropy as a stability estimator. Our approach is systemic in that it enables an overall estimation of the capacity of the banking system to provide liquidity. Mechanism developed can be employed for measuring systemic risk of banking system as a whole. 1 Introduction Schweitzer et al. [15] acknowledge that We need an approach that stresses the systemic complexity [. . . ] that can be used to revise and extend established paradigms in economic theory. M. Steinbacher () Faculty of Business Studies, Catholic Institute, Ljubljana, Slovenia e-mail: mitja.steinbacher@gmail.com M. Steinbacher Kiel Institute for The World Economy, Kiel, Germany e-mail: matjaz.steinbacher@gmail.com M. Steinbacher University of Donja Gorica, Podgorica, Montenegro e-mail: matej.steinbacher@gmail.com S. Leitner and F. Wall (eds.), Artificial Economics and Self Organization, Lecture Notes in Economics and Mathematical Systems 669, DOI 10.1007/978-3-319-00912-4 13, © Springer International Publishing Switzerland 2014 161