Credit risk linkages in the international banking network, 2000–2019

We estimate the evolution of credit risk linkages in an international banking network of 46 advanced and emerging market economies between January 2000 and December 2019. In our study, credit risk is proxied with the aggregate probability of default (PD) in the banking sector, and cross-country linkages are described by two types of networks: one representing predictive Granger relationships between the PD measures, and the other representing contemporaneous partial correlations. During the Global Financial Crisis and its aftermath, the density of the networks appears the highest, while experiencing a substantial decline in the post-crisis period triggered by massive deleveraging and the implementation of prudential measures. Throughout the whole observation period, the causal network exhibits the small-world pattern which tends to fuel risk propagation within the network, and the increasing degree of dissortativity which exerts a countervailing effect. On the country level, we document the centrality of the major Asian economies’ banking sectors and France, whereas the role of the USA, the UK and Germany appears moderate, which contrasts with the extant literature. Overall, from the policymaking perspective, our findings indicate that credit risk linkages in the international banking networks can notably differ from the relationships derived from cross-country bank claims.