Non-Performing Loans and Systemic Risk in Financial Networks

34 Pages Posted: 10 Mar 2020 Last revised: 2 Nov 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 impact of non-performing loans (NPLs) on 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 global financial network in 1991-2016 and identify a series of stylized facts. We show that many regularities found at national level by the literature hold also at international level. Based on our empirical findings, we develop a simple network model in which banks and firms are linked by their reciprocal claims and study how an exogenous increase in NPLs affects the stability of the system. We investigate the model using Monte Carlo simulations and show that there exists a critical threshold of NPLs beyond which a systemic crisis occurs. This implies that small variations in the magnitude of the initial shock can have very different consequences at the aggregate level.

Keywords: financial crisis, networks, 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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