Title: Interconnectedness of the banking sector as a vulnerability to crises
Citation: INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS vol. 24 no. 2 p. 963-990
Publication Year: 2019
JRC N°: JRC113224
ISSN: 1076-9307 (online)
URI: https://onlinelibrary.wiley.com/doi/abs/10.1002/ijfe.1701
DOI: 10.1002/ijfe.1701
Type: Articles in periodicals and books
Abstract: This paper uses macro-network to measure the interconnectedness of the banking sector, and relates it to banking crises in Europe. Beyond cross-border financial linkages of the banking sector, the macro-network also accounts for financial linkages to the other main financial and non-financial sectors within the economy. We find that a more central position of the banking sector in the macro-network significantly increases the probability of a banking crisis. By analyzing the different types of risk exposures, our evidence shows that credit is an important source of vulnerability. Finally, our early-warning models augmented with interconnectedness measures outperform traditional models in terms of out-of-sample predictions.
JRC Directorate:Growth and Innovation

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