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Credit risk and financial integration: An application of network analysis

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  • Bhattacharya, Mita
  • Inekwe, John Nkwoma
  • Valenzuela, Maria Rebecca

Abstract

Credit plays a significant role in the performance of the banking sector. This research relates financial integration to the credit risk of banks. We compute a measure of financial connectivity based on network statistics using syndicated loans. Using instrumental variable techniques for a panel of 39 countries over the periods of 1988 to 2014, we analyse the link between credit risk and financial integration. Our findings suggest that borrowing banks do not alleviate credit risk. Also, borrowing banks that are more active in the network also help to compound credit risk. However, the closeness centrality reveals a significant reduction in the credit risk of the borrowing banks. Our findings from individual countries reflect the significance of the country of operation of these banks in the international market.

Suggested Citation

  • Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2020. "Credit risk and financial integration: An application of network analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302325
    DOI: 10.1016/j.irfa.2020.101588
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    More about this item

    Keywords

    Finance; Interbank lending; Financial networks; Financial markets; Credit risk;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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