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Understanding risk spillover in multi-layer financial networks: The role of bank–firm connections

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  • Wang, Guanghou
  • Zhao, Han
  • Shu, Lei
  • Song, Lei

Abstract

As global financial markets continue to evolve and banking activities become increasingly complex, the interconnectedness of financial systems has grown, highlighting the critical importance of systemic risk management. This paper constructs a multi-layer complex network model including banks and firms to simulate the pathways through which firm-related risks propagate across the banking sector. The study explores how these factors influence systemic risk by simulating various capital–output elasticity coefficients, firm technological levels, and changing market conditions. The results show that firm operations significantly impact systemic risk, especially in deteriorating market conditions, where firm risks are amplified through the network structure and ultimately threaten the stability of the entire financial system. This research offers new insights into the mechanisms of risk contagion between firms and banks, providing valuable implications for systemic risk management strategies.

Suggested Citation

  • Wang, Guanghou & Zhao, Han & Shu, Lei & Song, Lei, 2025. "Understanding risk spillover in multi-layer financial networks: The role of bank–firm connections," International Review of Financial Analysis, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:finana:v:105:y:2025:i:c:s1057521925004910
    DOI: 10.1016/j.irfa.2025.104404
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