Systemic Risk and Centrality Revisited: The Role of Interactions

37 Pages Posted: 1 May 2017 Last revised: 4 Mar 2019

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Dominika Krygier

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Anders Vilhelmsson

Lund University - Department of Economics

Date Written: March 3, 2019

Abstract

We suggest that banks contribute extensively to systemic risk only if they are both “risky” and centrally placed in the financial network. To calculate systemic risk we apply the ∆CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank’s contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for “risky” banks and overestimates the effect for “safer” banks.

Keywords: Systemic Risk, Network Centrality, Loan Syndication, CoVaR

JEL Classification: G01, G18, G21, G28, G32, G38

Suggested Citation

Asgharian, Hossein and Krygier, Dominika and Vilhelmsson, Anders, Systemic Risk and Centrality Revisited: The Role of Interactions (March 3, 2019). Available at SSRN: https://ssrn.com/abstract=2960629 or http://dx.doi.org/10.2139/ssrn.2960629

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Dominika Krygier (Contact Author)

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

Anders Vilhelmsson

Lund University - Department of Economics ( email )

Lund
Sweden

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