  We develop a structural default model for interconnected financial
institutions in a probabilistic framework. For all possible network structures
we characterize the joint default distribution of the system using Bayesian
network methodologies. Particular emphasis is given to the treatment and
consequences of cyclic financial linkages. We further demonstrate how Bayesian
network theory can be applied to detect contagion channels within the financial
network, to measure the systemic importance of selected entities on others, and
to compute conditional or unconditional probabilities of default for single or
multiple institutions.
