Measuring Contagion Risk in International Banking
40 Pages Posted: 12 Aug 2019
Date Written: July 15, 2019
We propose a distress measure for national banking systems that incorporates not only banks' CDS spreads, but also how they interact with the rest of the global financial system via multiple linkage types. The measure is based on a tensor decomposition method that extracts an adjacency matrix from a multi-layer network, measured using banks' foreign exposures obtained from the BIS international banking statistics. Based on this adjacency matrix, we develop a new network centrality measure that can be interpreted in terms of a banking system's credit risk or funding risk.
Keywords: international banking, contagion risk, multi-layer networks, tensor decompositions
JEL Classification: G01, C58, C63
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