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Non-performing loans, systemic risk and resilience in financial networks

Author

Listed:
  • Giulio Bottazzi
  • Alessandro De Sanctis
  • Fabio Vanni

Abstract

After the outbreak of the financial crisis in 2007-2008 the level of non-performing loans (NPLs) in the affected economies has significantly increased. However, while in some countries this has been a transitory phenomenon, in others it still represents a major threat for financial stability and economic recovery. The present work investigates the relationship between non-performing loans, systemic risk and resilience of the financial system using a network-based approach. We develop a model with two types of agents, banks and firms, linked one another in a two-layers structure by their reciprocal claims. The model is studied analytically and via numerical simulations, and it allows to derive a synthetic measure of systemic risk and to identify the maximum level of NPLs sustainable by the financial system before it collapses. Finally, for illustrative purposes, we present an application of the model to Italy, Germany, and United Kingdom, using firm-level data for the three countries.

Suggested Citation

  • Giulio Bottazzi & Alessandro De Sanctis & Fabio Vanni, 2016. "Non-performing loans, systemic risk and resilience in financial networks," LEM Papers Series 2016/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    • Handle: RePEc:ssa:lemwps:2016/08
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    Cited by:

    1. Shumaila Zeb & Abdul Rashid, 2019. "Systemic risk in financial institutions of BRICS: measurement and identification of firm-specific determinants," Risk Management, Palgrave Macmillan, vol. 21(4), pages 243-264, December.
    2. Lambert, David & Vanni, Fabio, 2018. "Complexity and heterogeneity in a dynamic network," Chaos, Solitons & Fractals, Elsevier, vol. 108(C), pages 94-103.
    3. David Lambert & Fabio Vanni, 2017. "Complexity and Heterogeneity in a Dynamic Network," LEM Papers Series 2017/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. Mihir Dash, 2021. "Non-Performing Loans and Systemic Risk of Indian Banks," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 10(1), pages 10-20, April.
    5. Fang, Lei & Cheng, Jiang & Su, Fang, 2019. "Interconnectedness and systemic risk: A comparative study based on systemically important regions," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 147-158.

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    Keywords

    financial crisis; network theory; non-performing loans; resilience; systemic risk;
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