Assessing Systemic Risk in Taiwan’s Financial Holding Industry: A Network Analysis of VaR, CoVaR, and COVID-19 Impacts

Based on the transmission of financial shocks through financial connections causing systemic risk, this study employs Granger causality tests to analyze the causal relationships among financial holding companies. It also uses dynamic Value at Risk (VaR) and Conditional Value at Risk (CoVaR) methods to quantify individual and systemic risks to investigate the impact of COVID-19 on systemic risk. At the same time, Social Network Analysis (SNA) is used to mark the degree of connection, closeness, and betweenness among the group of financial holding companies. The results show that from 2017 to 2023, overall systemic risk exhibited a trend from weak to strong, with the most significant changes occurring during the global pandemic outbreak in 2020, followed by the initial outbreak in Taiwan in 2022. This finding is consistent with views in other studies. As systemic risk significantly increased, closeness also notably rose, indicating that the network structure became more centralized as systemic risk increased. After 2020, among the 14 financial holding companies in the study, IBF Financial Holding Company demonstrated the strongest network connectivity, closeness, and betweenness. Observing changes in CoVaR values with the inclusion of dummy variables, the results show that CoVaR can better reflect changes in systemic risk because of these variables. Besides these findings, recent years have seen changes in Taiwan’s financial market, such as increased diversity of financial products, advancements in financial transaction technology, and decentralization, which have also led to faster transmission of systemic risk within the financial network. These phenomena further emphasize the critical role of certain core institutions in risk propagation during financial crises and highlight the need for more prudent risk management measures to address potential losses and increased systemic risk.