Structural Vulnerability of Banking Network – Systemic Risk Approach

This academic paper by Dr Farhad Reyazat advances existing research by presenting a framework for monitoring potential threats to the stability of the banking sector. It examines structural vulnerabilities at the national level and also considers bilateral exposures in a networked context. Specifically, the study analyzes systemic risk in European banking at an aggregate level, incorporating factors such as bank size and interconnectedness in relation to the overall economy. It considers the concentration ratio of the banking industry within the broader economy.

The systemic risk is shown to depend on the interaction between network topology and the nature of financial transactions, including assets and buffers influenced by bank size, correlations, and the nature of financial shocks. The findings highlight the significance of factors like bank size, economic size, and concentration of counterparty exposures in determining a country’s systemic importance. The study reveals the dependency of the banking network on a few key hubs and how this reliance has evolved over the last nine years.

Particularly noteworthy is the changing role of traditional financial hubs like Swiss, British, and Irish banks. Irish banks, which saw significant growth from the 1990s until 2008, had shifted from a leading position in 2006 to the fourth position by 2014. The paper’s in-degree concentration index analysis indicates that the concentration in the banking network remained constant post the 2007-2008 financial crisis. As of the first quarter of 2014, the US, UK, and Germany collectively accounted for over 70% of network exposures, a trend consistent with 2007 data. However, the UK’s role as a hub has increased, while the market shares of the US and Germany have slightly decreased.

For the complete version of this paper, published in the World Academy of Science, Engineering and Technology International Journal of Economics and Management Engineering Vol:9, No:01, 2015, please refer to the provided link. https://publications.waset.org/abstracts/20649/structural-vulnerability-of-banking-network-systemic-risk-approach