A Critical Review of Contagion Risk in Banking

Hasman, Augusto

doi:10.1111/j.1467-6419.2012.00739.x

Cited by 42 publications

(16 citation statements)

References 143 publications

(145 reference statements)

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“…In the recent years, the issue of resilience of financial systems has occupied center stage in both theoretical and applied research (Allen and Babus, 2009;Hasman, 2012). After the events that culminated with the bankruptcy of Lehman Brothers on September 15, 2008, it has become increasingly clear that in order to explain phenomena such as contagion and systemic risk in financial markets, new methodologies able to address the deep causes of structural vulnerability of the financial sector were needed (Haldane, 2009;Catanzaro and Buchanan, 2013).…”

Section: Introductionmentioning

confidence: 99%

Systemic Risk, Contagion, and Financial Networks: A Survey

Chinazzi¹,

Fagiolo

2013

SSRN Journal

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The recent crisis has highlighted the crucial role that existing linkages among banks and financial institutions plays in channeling and amplifying shocks hitting the system. The structure and evolution of such web of linkages can be fruitfully characterized using concepts borrowed from the theory of (complex) networks. This paper critically surveys recent theoretical work that exploits this concept to explain the sources of contagion and systemic risk in financial markets. We taxonomize existing contributions according to the impact of network connectivity, bank heterogeneity, existing uncertainty in financial markets, portfolio composition of the banks. We end with a discussion of the most important challenges faced by theoretical network-based models of systemic risk. These include a better understanding of the causal links between network structure and the likelihood of systemic risk and increasingly using the empirical knowledge about real-world financial-network structures to calibrate theoretical models.

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Section: Introductionmentioning

confidence: 99%

Systemic Risk, Contagion, and Financial Networks: A Survey

Chinazzi¹,

Fagiolo

2013

SSRN Journal

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“…This choice is made with the aim of investigating and measuring the amount of spillover that could be explained by the transmission channels, as summarized by the network, and of prescribing an intervention in order to reduce spillover and mitigate risk. Our methodol-ogy thus relates to previous analyses pointing at what is called direct contagion as opposed to informational contagion (see Allen et al (2009);Hasman (2013)). …”

Section: Introductionmentioning

confidence: 92%

Networks in Risk Spillovers: A Multivariate GARCH Perspective

et al. 2016

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We propose a spatial approach for modeling risk spillovers using financial time-varying proximity matrices based on observable networks. We show how these methods could be useful in (i) isolating risk channels, risk spreaders and risk receivers, (ii) investigating the role of portfolio composition in risk transfer, and (iii) computing target exposure structures able to reduce the forecasted system variance and thus the risk of the system. Our empirical analysis builds on banks' foreign exposures provided by the Bank of International Settlements (BIS) as a proxy for Euro area cross-country holdings. We find, in the European sovereign bond markets, that Germany, Italy and, to a lesser extent, Greece are playing a central role in spreading risk, and Ireland and Spain are the most susceptible receivers of spillover effects that can be traced back to a physical claim channel: banks' foreign exposures. We additionally show that acting on these physical channels before the sovereign crisis, it would have been possible to have a clear risk mitigation outcome Keywords spatial GARCH, network, risk spillover, financial spillover. JEL Codes C58, G10 AbstractWe propose a spatial approach for modeling risk spillovers using financial time-varying proximity matrices based on observable networks. We show how these methods could be useful in (i) isolating risk channels, risk spreaders and risk receivers, (ii) investigating the role of portfolio composition in risk transfer, and (iii) computing target exposure structures able to reduce the forecasted system variance and thus the risk of the system. Our empirical analysis builds on banks' foreign exposures provided by the Bank of International Settlements (BIS) as a proxy for Euro area cross-country holdings. We find, in the European sovereign bond markets, that Germany, Italy and, to a lesser extent, Greece are playing a central role in spreading risk, and Ireland and Spain are the most susceptible receivers of spillover effects that can be traced back to a physical claim channel: banks' foreign exposures. We additionally show that acting on these physical channels before the sovereign crisis, it would have been possible to have a clear risk mitigation outcome.

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“…An important difference between their study and ours, however, is that we explicitly evaluate the transmission of risks beyond the banking sector, using a sample of CDS spreads that includes a large number of nonfinancial corporations. For a comprehensive review on risk spillovers we refer the reader to two related literature surveys by Hasman () and Chinazzi and Fagiolo (). One feature of the literature is the overwhelming emphasis on the transmission of risks between banks and sovereigns.…”

Section: Introductionmentioning

confidence: 99%

Analyzing credit risk transmission to the nonfinancial sector in Europe: A network approach

Gross

Siklos

2019

J of Applied Econometrics

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Summary We use a factor model and elastic net shrinkage to model a high‐dimensional network of European credit default swap (CDS) spreads. Our empirical approach allows us to assess the joint transmission of bank and sovereign risk to the nonfinancial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and nonfinancial entities as well as sovereigns are grouped around the financial center. The network has a geographical component reflected in different patterns of real‐sector risk transmission across countries. Our framework also provides dynamic estimates of risk transmission, a useful tool for systemic risk monitoring.

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A Critical Review of Contagion Risk in Banking

Cited by 42 publications

References 143 publications

Systemic Risk, Contagion, and Financial Networks: A Survey

Systemic Risk, Contagion, and Financial Networks: A Survey

Networks in Risk Spillovers: A Multivariate GARCH Perspective

Analyzing credit risk transmission to the nonfinancial sector in Europe: A network approach

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