• 2 July 2024
Systemic Risk in European Banking

The financial crisis 2007-8 has underscored the need to go beyond the analysis of individual institutions’ soundness and assess whether the linkages across institutions may have systemic implications. The undeniable need to prevent such a crises in the future as well as to assess previous errors by way of comprehensive compliance has made such an assessment absolutely imperative.

This paper explains the suitable analytical tool for assessing and monitoring systemic risk in EU banks which in turn enables us to visualise the relationship between the financial network topology and systemic risk. This paper aims to examine the structure of financial network at an individual country’s level using network formation theory and then illustrate the structure of this network. The concept of core-periphery network is empirically tested in the paper by using the probit regressions testing whether network position can be predicted by individual network variables. The same methodology as Craig & Von Peter used for perfect core periphery structure. (Craig & Von Peter, 2010). The results confirmed the previous finding in this fields (for example see (Farboodi., 2014)). It shows that interbank relations coming to a core-periphery structure where the fit with Betweeness is much better than the fit with cross border exposures. The model indicates that there is a small number of very interconnected banks that trade with many other banks and a large number of banks that trade with a small number of counterparties.

When we study the banking network, with a consideration of all the complexities of the financial structure, one key question is ‘how can we improve our understanding?’ One of the key goal of this paper is to map out the effect of cross-border bilateral exposures and their macroeconomics consequences, as well as evaluate the topology of network and its effect on shocks transmission.

See also  "Navigating the Risks and Rewards of AI in the Financial Sector"

The paper points out that (i) banking network coming into scale free structure ;(ii) interbank structure follow the core-periphery structure (iii) the composition of banks group within the core sector remains remarkably stable over time. (iv) among centrality measures the fit of Core with Betweeness is much better than others; (v) countries with shallow domestic financial markets and concentrated exposures to a few lenders are more prone to synchronized shifts in cross-border flows; (vi) the importance of heterogeneity in network structure and the role of concentration of counterparty exposures in explaining its systemic importance of a banking sector in the economy; (vii) American banks positions in the network changed from fragile section to important and fragile; and(viii)common factors (such as global risk aversion) increasingly drive global financial markets and tend to intensify abruptly during periods of stress, amplifying shock transmission.

This paper contributes to the existent literature by examining the structure of banking network and developing a framework that explains how interdependencies between banks at country level emerge endogenously by mapping out the banking network. Please see the full text on the following file.

Leave a Reply

Your email address will not be published. Required fields are marked *