Assessing Systemic Risk and Structural Vulnerability in the EU & Global Banking Sector through Network Analysis

Dr Farhad Reyazat

June 2016

In June 2016, I introduced a novel metric for systemic risk that captures the degree of both direct and indirect interconnections among banks, utilizing a correlation-based network approach. This method quantifies interconnectedness as a risk factor, empirically demonstrating how banking network interconnections influence systemic risk. The study sheds light on cross-border banking activities and compares the resilience of the US banking system to European counterparts. It recommends further exploration in areas like global risk monitoring enhancements and the correlation between banking sector risks and macroeconomic indicators. This research underlines the critical need to comprehend banking sector interdependencies to mitigate systemic risks effectively. We present a comprehensive risk concentration index by analyzing bilateral exposure cascades and the concentration of connections within selected networks, leveraging unique datasets of bank exposures, balance sheets, and economic indicators. This work enhances the current academic discourse by detailing the banking network’s structure and inter-bank dependencies at the country level, contributing to systemic risk. It equips policymakers with analytical tools for assessing the financial system’s complex dependency structures and the impact of regulatory decisions, offering insights into managing systemic risks more effectively. See the full article below