A multilevel analysis of financial institutions' systemic exposure from local and system-wide information.

Abstract:

:In the aftermath of the financial crisis of 2007-2009, the growing body of literature on financial networks has widely documented the predictive power of topological characteristics (e.g., degree centrality measures) to explain the systemic impact or systemic exposure of financial institutions. This study shows that considering alternative topological measures based on local sub-network environment improves our ability to identify systemic institutions. To provide empirical evidence, we apply a two-step procedure. First, we recover network communities (i.e., close-peer environment) on a spillover network of financial institutions. Second, we regress alternative measures of vulnerability (i.e. firm's losses)on three levels of topological measures: the global level (i.e., firm topological characteristics computed over the whole system), local level (i.e., firm topological characteristics computed over the community to which it belongs), and aggregated level by averaging individual characteristics over the community. The sample includes 46 financial institutions (banks, broker-dealers, and insurance and real-estate companies) listed in the Standard & Poor's 500 index. Our results confirm the informational content of topological metrics based on a close-peer environment. Such information is different from that embedded in traditional system-wide topological metrics and can help predict distress of financial institutions in times of crisis.

journal_name

Sci Rep

journal_title

Scientific reports

authors

Gandica Y,Béreau S,Gnabo JY

doi

10.1038/s41598-020-74259-7

subject

Has Abstract

pub_date

2020-10-19 00:00:00

pages

17657

issue

1

issn

2045-2322

pii

10.1038/s41598-020-74259-7

journal_volume

10

pub_type

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