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Macro-networks: an application to the euro area financial accounts

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  • Castrén, Olli
  • Rancan, Michela

Abstract

We use financial accounts data at sector level to construct financial networks for individual euro area countries. We then connect the country-level networks to one large “Macro Network”, using information on cross-border linkages between the national banking sectors. We then evaluate the features of the resulting framework using various network statistics. Shock simulations reveal that the structural features of the bilateral linkages are a key determinant of the losses that may be generated when the shocks propagate in the system. The network structures evolve over time, showing increasing interconnectedness in different instrument categories before the financial crisis hit in 2007, and a sharp retrenchment from bilateral exposures after the crisis started. This reflects the surge in counterparty risk and the de-leveraging processes which were triggered by the initial asset price losses and were further amplified by the economic downturn. As a consequence, there was a marked deterioration in financial integration both within economies and across countries in the euro area. Nonetheless, our analysis suggests that the risk of contagion is not reduced, while a more diversified portfolio of cross-border exposures might mitigate shocks effects. JEL Classification: E44, F36, G01, G15, G21

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1510.

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Date of creation: Feb 2013
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Handle: RePEc:ecb:ecbwps:20131510

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Keywords: Balance sheet contagion; cross-border exposures; Financial crises; Financial networks; interconnectedness;

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  1. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
  2. Degryse, H.A. & Elahi, M.A. & Penas, M.F., 2009. "Cross-Border Exposures and Financial Contagion," Discussion Paper 2009-20, Tilburg University, Center for Economic Research.
  3. Kavonius, Ilja Kristian & Castrén, Olli, 2009. "Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area," Working Paper Series 1124, European Central Bank.
  4. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
  5. Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
  6. Javier A. Reyes & Camelia Minoiu, 2011. "A Network Analysis of Global Banking:1978-2009," IMF Working Papers 11/74, International Monetary Fund.
  7. Iman van Lelyveld & Franka Liedorp, 2004. "Interbank Contagion in the Dutch Banking Sector," DNB Working Papers 005, Netherlands Central Bank, Research Department.
  8. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
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Cited by:
  1. Spiros Bougheas & Alan Kirman, 2014. "Complex Financial Networks and Systemic Risk: A Review," Discussion Papers 2014/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Aldasoro, Iñaki & Angeloni, Ignazio, 2013. "Input-output-based measures of systemic importance," SAFE Working Paper Series 29, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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