Financial applications of Flow Network theory

This paper reviews some recent applications of ow network theory to the modelling of nancial systems and of interbank liquidity networks. Three features of network ows have proven to be particularly useful in this eld: i) the modularity of the transmission of ows across a network; ii) the constancy of a ow across all cuts of a nertwork; iii) the known max ow minimum cut theorem by Ford and Fulkerson. These properties of ow networks have been applied to evaluate the exposition to contagion of nancial networks and the carrying capacity of interbank liquidity networks.