Network Linkages to Predict Bank Distress

39 Pages Posted: 18 Mar 2015 Last revised: 2 May 2015

See all articles by Tuomas A. Peltonen

Tuomas A. Peltonen

European Central Bank (ECB)

Andreea Constantin

University of Lausanne, HEC, IBF

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Date Written: April 30, 2015


Building on the literature on systemic risk and financial contagion, the paper introduces estimated network linkages into an early-warning model to predict bank distress among European banks. We use multivariate extreme value theory to estimate equity-based tail-dependence networks, whose links proxy for the markets' view of bank interconnectedness in case of elevated financial stress. The paper finds that early warning models including estimated tail-dependencies consistently outperform bank-specific benchmark models without networks. The results are robust to variation in model specification and also hold in relation to simpler benchmarks of contagion. Generally, this paper gives direct support for measures of interconnectedness in early-warning models, and moves toward a unified representation of cyclical and cross-sectional dimensions of systemic risk.

Keywords: bank distress, bank networks, systemic risk

JEL Classification: G21, G33, C54, D85

Suggested Citation

Peltonen, Tuomas A. and Constantin, Andreea and Sarlin, Peter, Network Linkages to Predict Bank Distress (April 30, 2015). Available at SSRN: or

Tuomas A. Peltonen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Andreea Constantin

University of Lausanne, HEC, IBF ( email )

CH-1015 Lausanne

Peter Sarlin

Hanken School of Economics

PO Box 479
FI-00101 Helsinki

RiskLab Finland ( email )

Turku, 20520


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