Mapping Systemic Risk in the International Banking Network

41 Pages Posted: 21 Mar 2011

See all articles by Rodney Garratt

Rodney Garratt

Independent

Lavan Mahadeva

Bank of England - Monetary Analysis

Katsiaryna Svirydzenka

International Monetary Fund (IMF)

Date Written: March 2, 2011

Abstract

Systemic risk among the network of international banking groups arises when financial stress threatens to criss-cross many national boundaries and expose imperfect international co-ordination. To assess this risk, we apply an information theoretic map equation due to Martin Rosvall and Carl Bergstrom to partition banking groups from 21 countries into modules. The resulting modular structure reflects the flow of financial stress through the network, combining nodes that are most closely related in terms of the transmission of stress. The modular structure of the international banking network has changed dramatically over the past three decades. In the late 1980s four important financial centres formed one large supercluster that was highly contagious in terms of transmission of stress within its ranks, but less contagious on a global scale. Since then the most influential modules have become significantly smaller and more broadly contagious. The analysis contributes to our understanding as to why defaults in US sub-prime mortgages had such large global implications.

Keywords: Networks, international banking groups, systemic risk, information theory

JEL Classification: F2, F3

Suggested Citation

Garratt, Rodney and Mahadeva, Lavan and Svirydzenka, Katsiaryna, Mapping Systemic Risk in the International Banking Network (March 2, 2011). Bank of England Working Paper No. 413, Available at SSRN: https://ssrn.com/abstract=1786571 or http://dx.doi.org/10.2139/ssrn.1786571

Rodney Garratt

Independent ( email )

Lavan Mahadeva (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Katsiaryna Svirydzenka

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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