Assessing systemic risk using interbank exposures in the global banking system |
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Affiliation: | 1. Clemson University, 336-D Sirrine Hall, Clemson, SC 29632, United States;2. DePaul University, 1 E. Jackson Blvd. – Room 5531, Chicago, IL 60604, United States;1. Heriot-Watt University, Accountancy, Economics & Finance, United Kingdom;2. University of Southampton, Southampton Business School, United Kingdom |
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Abstract: | This paper contributes to the literature on systemic risk by examining the network structure of bilateral exposures in the global banking system. The global interbank market constitutes a major part of the global banking system. The market has a hierarchical network structure, composed of the national or jurisdictional area's local markets and the cross-border interbank market. First, we estimate the bilateral exposures matrix using aggregate financial data on loans and deposits from Bankscope and analyze the interconnectedness in the market using network centrality measures. Subsequently, for the model analysis, we apply the Eisenberg–Noe framework to a multi-period setting. In this framework, bank defaults are classified into stand-alone defaults and contagious defaults. The banks in our sample (i.e., the top 202 banks with more than $50 billion in total assets) comprise a major part of this global banking system. The main findings are as follows: The theoretical network analysis using network centrality measures showed that most of the banks designated as global systemically important banks (G-SIBs) play a central role in the global interbank market. The theoretical default analysis showed a few contagious defaults triggered by the basic defaults during and after the global financial crisis. Our stress test proved that many G-SIBs theoretically caused 1–6 contagious defaults. Our methodology would assist in the development of a monitoring system by the respective supervisory authorities as well as in the implementation of bank-internal stress tests of default contagion. |
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Keywords: | Systemic risk Global banking system Interconnectedness Contagious default Network centrality |
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