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A multilevel analysis of financial institutions’ systemic exposure from local and system-wide information

Authors
  • Gandica, Yérali1, 1, 2, 2, 3
  • Béreau, Sophie1, 1, 2
  • Gnabo, Jean-Yves1, 1
  • 1 University of Namur, Namur, Belgium , Namur (Belgium)
  • 2 Université catholique de Louvain, Ottignies-Louvain-la-Neuve, Belgium , Ottignies-Louvain-la-Neuve (Belgium)
  • 3 CY Cergy Paris Université, CNRS, Laboratoire de physique théorique et modelisation, Cergy, Île-de-France, 95000, France , Cergy (France)
Type
Published Article
Journal
Scientific Reports
Publisher
Springer Nature
Publication Date
Oct 19, 2020
Volume
10
Issue
1
Identifiers
DOI: 10.1038/s41598-020-74259-7
Source
Springer Nature
License
Green

Abstract

In the aftermath of the financial crisis of 2007–2009, the growing body of literature on financial networks has widely documented the predictive power of topological characteristics (e.g., degree centrality measures) to explain the systemic impact or systemic exposure of financial institutions. This study shows that considering alternative topological measures based on local sub-network environment improves our ability to identify systemic institutions. To provide empirical evidence, we apply a two-step procedure. First, we recover network communities (i.e., close-peer environment) on a spillover network of financial institutions. Second, we regress alternative measures of vulnerability (i.e. firm’s losses)on three levels of topological measures: the global level (i.e., firm topological characteristics computed over the whole system), local level (i.e., firm topological characteristics computed over the community to which it belongs), and aggregated level by averaging individual characteristics over the community. The sample includes 46 financial institutions (banks, broker-dealers, and insurance and real-estate companies) listed in the Standard & Poor’s 500 index. Our results confirm the informational content of topological metrics based on a close-peer environment. Such information is different from that embedded in traditional system-wide topological metrics and can help predict distress of financial institutions in times of crisis.

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