Banking Networks, Systemic Risk, and the Credit Cycle in Emerging Markets

54 Pages Posted: 6 Feb 2020

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Subhankar Nayak

Wilfrid Laurier University - Financial Services Research Centre

Date Written: January 12, 2020

Abstract

We undertake a large-scale empirical examination of systemic risk among 1048 financial institutions in a large sample of 23 emerging markets, broken down into 5 regions. This work extends the large literature on systemic risk in the US, Europe, and other developed countries to emerging markets, which is relatively under-researched. We present a novel systemic risk score for each financial system by region, across time. This measure is additively decomposable and attributable to each financial institution, and may be used as an objective and quantifiable measure of whether a bank is a SIFI (systemically important financial institution). The level and timing of systemic risk is heterogenous across the 5 regions, and this risk is concentrated in a few banks, more so pre-crisis than post-crisis. Credit and network effects account for over 2/3 of systemic risk (and in some cases, almost all of the risk), and the remaining comes from individual bank variables. Spillovers of systemic risks across regions are mostly contemporaneous within the quarter. A primary principal component (default level) accounts for 1/2 of the variation in systemic risk across the regions with the next two principal components (policy uncertainty and liquidity) accounting for 1/5 each. Aggregate default risk in a region is statistically predictable using our systemic risk metric, thereby supporting timely macro-prudential policy-making.

Keywords: systemic risk, network risks, default risk, emerging markets, financial instituions

JEL Classification: G00, G01, G10, G15

Suggested Citation

Das, Sanjiv Ranjan and Kalimipalli, Madhu and Nayak, Subhankar, Banking Networks, Systemic Risk, and the Credit Cycle in Emerging Markets (January 12, 2020). Available at SSRN: https://ssrn.com/abstract=3520343 or http://dx.doi.org/10.2139/ssrn.3520343

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Madhu Kalimipalli (Contact Author)

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

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

Subhankar Nayak

Wilfrid Laurier University - Financial Services Research Centre ( email )

Waterloo, Ontario N2L 3C5
Canada

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