This paper uses macro-networks 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, macro-networks also account for financial linkages to the other main financial and non-financial sectors within the economy. We enrich conventional early-warning models using macro-financial vulnerabilities, by including network measures of banking sector as potential determinants of banking crises. Our results show 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, the results show that early-warning models augmented with interconnectedness measures outperform traditional models in terms of out-of-sample predictions of recent banking crises in Europe.
PELTONEN Tuomas;
RANCAN Michela;
SARLIN Peter;
2016-01-05
European Central Bank
JRC97037
978-92-899-1679-0,
1725-2806,
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1866.en.pdf,
https://publications.jrc.ec.europa.eu/repository/handle/JRC97037,
10.2866/446196,
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