Financial Bridges and Network Communities

47 Pages Posted: 14 May 2018 Last revised: 4 Oct 2018

See all articles by Roberto Casarin

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics

Michele Costola

Goethe University Frankfurt - Research Center SAFE

Erdem Yenerdag

Washington University in St. Louis - Department of Economics

Date Written: September 29, 2018

Abstract

The paper analyses the contagion channels of the European financial system through the stochastic block model (SBM). The model groups homogeneous connectivity patterns among the financial institutions and describes the shock transmission mechanisms of the financial networks in a compact way. We analyse the global financial crisis and European sovereign debt crisis and show that the network exhibits a strong community structure with two main blocks acting as shock spreader and receiver, respectively. Moreover, we provide evidence of the prominent role played by insurances in the spread of systemic risk in both crises. Finally, we demonstrate that policy interventions focused on institutions with inter-community linkages (community bridges) are more effective than the ones based on the classical connectedness measures and represents consequently, a better early warning indicator in predicting future financial losses.

Keywords: Systemic Risk, Financial Institutions, Network Communities, Financial Crises

JEL Classification: G12, G29, C51

Suggested Citation

Casarin, Roberto and Costola, Michele and Yenerdag, Erdem, Financial Bridges and Network Communities (September 29, 2018). SAFE Working Paper No. 208. Available at SSRN: https://ssrn.com/abstract=3178053 or http://dx.doi.org/10.2139/ssrn.3178053

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics ( email )

San Giobbe 873/b
Venice, 30121
Italy
+39 030.298.91.49 (Phone)
+39 030.298.88.37 (Fax)

HOME PAGE: http://venus.unive.it/r.casarin/

Michele Costola (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Erdem Yenerdag

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://www.erdemyenerdag.com

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