Non-Performing Loans and Systemic Risk in Financial Networks

35 Pages Posted: 10 Mar 2020

See all articles by Giulio Bottazzi

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Alessandro De Sanctis

Paris School of Economics, Université Paris 1 Panthéon-Sorbonne

Fabio Vanni

Observatoire Français des Conjonctures Economiques (OFCE)

Date Written: February 17, 2020

Abstract

In this paper we study the implications of non-performing loans (NPLs) for financial stability using a network-based approach. We start by combining loan-level data from DealScan and firm-level data from Orbis to reconstruct the empirical global financial network in the period 1991-2016 and identify a series of stylized facts. Based on these findings, we develop a model in which two types of agents, banks and firms, are linked in a network by their reciprocal claims and analyze how an increase in NPLs affects the stability of the system. We study the model analytically and with numerical simulations, deriving a synthetic measure of systemic risk and quantifying the threshold level of NPLs that triggers a systemic crisis. Our model shows that there exist a level of connectivity that maximizes the fragility of the financial system and that small changes in the initial NPLs shock can have very different consequences at the aggregate level.

Keywords: financial crisis, network theory, non-performing loans, resilience, systemic risk

JEL Classification: G21, C63, G01, D85

Suggested Citation

Bottazzi, Giulio and De Sanctis, Alessandro and Vanni, Fabio, Non-Performing Loans and Systemic Risk in Financial Networks (February 17, 2020). Available at SSRN: https://ssrn.com/abstract=3539741 or http://dx.doi.org/10.2139/ssrn.3539741

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy
+39-050-883343 (Phone)
+39-050-883344 (Fax)

Alessandro De Sanctis (Contact Author)

Paris School of Economics, Université Paris 1 Panthéon-Sorbonne ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Fabio Vanni

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

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