  We consider a model of financial contagion in a bipartite network of assets
and banks recently introduced in the literature, and we study the effect of
power law distributions of degree and balance-sheet size on the stability of
the system. Relative to the benchmark case of banks with homogeneous degrees
and balance-sheet sizes, we find that if banks have a power-law degree
distribution the system becomes less robust with respect to the initial failure
of a random bank, and that targeted shocks to the most specialised banks (i.e.
banks with low degrees) or biggest banks increases the probability of observing
a cascade of defaults. In contrast, we find that a power-law degree
distribution for assets increases stability with respect to random shocks, but
not with respect to targeted shocks. We also study how allocations of capital
buffers between banks affects the system's stability, and we find that
assigning capital to banks in relation to their level of diversification
reduces the probability of observing cascades of defaults relative to size
based allocations. Finally, we propose a non-capital based policy that improves
the resilience of the system by introducing disassortative mixing between banks
and assets.
