BRUSSELS ECONOMIC REVIEW – CAHIERS ECONOMIQUES DE BRUXELLES VOL. 55(1) SPRING 2012 75 BANKS CONNECTIVITY, CREDIT RISK TRANSFER, AND STABILITY OF THE BANKING SYSTEM JULIEN BARRE * (UNIVERSITY NICE - SOPHIA ANTIPOLIS), ALAIN RAYBAUT ** (UNIVERSITY NICE - SOPHIA ANTIPOLIS) AND DOMINIQUE TORRE *** (UNIVERSITY NICE - SOPHIA ANTIPOLIS) ABSTRACT: Our dynamic model captures the network relations generated by credit risk transfer and securitization. Each bank determines its own level of risk according to fundamentals and the level of risk of its environment, given the possibilities opened by credit risk transfer. The dynamics of the model is generated by the network structure of the interbank relations. A highly connected network generates forces able to make the long term equilibrium of the bank industry dependant on initial conditions. Irregularity in the network can also explain that a final heterogeneity appear in the final situation of banks, even when their fundamentals were originally similar. JEL CODES: G01, G2. KEYWORDS: Banking networks, securitization, financial crisis contagion. * University Nice - Sophia Antipolis - Laboratoire Dieudonné - CNRS. E-mail: julien.barre@unice.fr ** University Nice - Sophia Antipolis - GREDEG – CNRS. E-mail: alain.raybaut@gredeg.cnrs.fr *** University Nice - Sophia Antipolis - GREDEG – CNRS. E-mail: dominique.torre@gredeg.cnrs.fr