Financial Network and Interconnected Risk in an Advanced Emerging Economy

Best Paper Award (Best Applied Paper) at 4th European Conference on Banking and the Economy (ECOBATE 2016), Winchester, UK

Conference paper of 2nd RiskLab/BoF/ECB/ESRB Conference on Systemic Risk Analysis in Helsinki, Finland, Oct 2016

40 Pages Posted: 8 Jan 2017 Last revised: 18 Jan 2017

See all articles by Ariel Sun

Ariel Sun

Imperial College London, Business School; Cranfield University - School of Management; Univesrity of Essex; International Monetary Fund (IMF) - Monetary and Capital Markets Department; Deutsche Bundesbank - Research Centre

Jorge A. Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO); National University of Singapore (NUS) - Risk Management Institute

Date Written: January 8, 2017

Abstract

Financial networks could become fragile during periods of economic and financial distress, since interconnectedness among participating firms could transmit and amplify adverse shocks. Relying on balance sheet data, complemented with complete bilateral interbank exposures, this paper analyzes interconnectedness in an advanced emerging market economy, using two complementary approaches. The first (micro) approach focuses on network topology, and finds that this financial system resembles a highly clustered small-world network, with connectivity and exposures exhibiting a (double) heavy tail distribution, which favors the formation of strong community structure and preferential attachment in the network. This shows evidence of convergence to developed economy, Austrian network (Boss et al. (2004)), and another emerging economy, Brazilian network (Cont et al (2012)). Bank size is pareto distributed, and highly correlated with centrality, representing node importance as systemically important financial institutions (SIFIs) in this network. The second (macro) approach focuses on how the network topology contributes to the transmission of shocks modeling default contagion, using balance-sheet network analysis. It finds that direct counterparty credit exposure poses less risk to the banking system than fire-sale losses triggered by liquidity shocks. Both approaches, either using a topological or induced system losses perspective, identify SIFIs consistently by accounting for both macro and microprudential risk dimensions.

Keywords: banking system; emerging market; contagion; systemic risk; interconnectedness; interbank network; centrality; macroprudential; microprudential

JEL Classification: B26; E58; G01

Suggested Citation

Sun, Ariel and Chan-Lau, Jorge Antonio, Financial Network and Interconnected Risk in an Advanced Emerging Economy (January 8, 2017). Best Paper Award (Best Applied Paper) at 4th European Conference on Banking and the Economy (ECOBATE 2016), Winchester, UK, Conference paper of 2nd RiskLab/BoF/ECB/ESRB Conference on Systemic Risk Analysis in Helsinki, Finland, Oct 2016, Available at SSRN: https://ssrn.com/abstract=2895796 or http://dx.doi.org/10.2139/ssrn.2895796

Ariel Sun (Contact Author)

Imperial College London, Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Univesrity of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Jorge Antonio Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO) ( email )

10 Shenton Way #11-07/08
MAS Building
Singapore, 079117
Singapore

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
196
Abstract Views
1,095
Rank
279,781
PlumX Metrics