The contagious capacity of the international banking network: 1985-2009
AbstractSystemic risk among the network of international banking groups arises when financial stress threatens to crisscross many national boundaries and expose imperfect international coordination. To assess this risk, we use Rosvall and Bergstromâ€™s (PNAS, 2008, 1118-1123) information theoretic map equation to partition banking groups from 21 countries into modules. We consider a quarter of a century of data on the cross-border interbank market. We show that in the late 1980s four important financial centres formed one large super cluster that was highly contagious in terms of transmission of stress within its ranks, but less contagious on a global scale. But the expansion leading to the 2008 crisis left more transmitting hubs sharing the same total influence as a few large modules had previously. We show that this greater entanglement meant the network was more broadly contagious, and not that risk was more shared. Thus, our analysis contributes to our understanding as to why defaults in US sub-prime mortgages spread quickly through the network.
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Bibliographic InfoPaper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt0r89f16p.
Date of creation: 16 Oct 2011
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Social and Behavioral Sciences; Contagion; Finance; Networks;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-BAN-2012-03-28 (Banking)
- NEP-NET-2012-03-28 (Network Economics)
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