Measuring Interconnectedness in the Philippine Banking System: Insights from Credit, Liquidity, and Payment Networks

This study examines the interconnectedness of the Philippine banking system across three contagion channels: interbank loans, interbank deposits, and payment systems. Using network data from 481 banks supervised by the Bangko Sentral ng Pilipinas (BSP), the study applies topology-based measures to assess the structure and strength of interbank linkages. It introduces two metrics: the Overall Interconnectedness Index (OII), which measures the level of connectedness of the network, and the Core Connectivity Index (CCI), which identifies robustly linked banks within the system. The results show that payments are more interconnected than loans and deposits, but the overall interconnectedness remains very low across all channels. For the full banking system, OII values range from 0.06 to 0.65%, indicating a sparse network structure. In the core network of universal and commercial banks, loans and deposits show modestly higher interconnectedness, while payments display a much stronger core–periphery pattern. The CCI results are consistent with these findings, confirming weak connectedness in the loans and deposits networks and relatively stronger connectedness in the payments network. These findings suggest that the Philippine interbank network has limited potential for contagion through small shocks, but its sparse structure may also reduce risk-sharing capacity and weaken the system’s ability to absorb larger shocks. The proposed measures offer a useful framework for monitoring systemic risk and identifying banks that contribute most to interconnectedness. They also provide policy implications for financial regulators, like BSP, in strengthening financial stability through improved market access, payment system participation, and macroprudential surveillance.