Diversification and Systemic Risk: A Financial Network Perspective

Frey, Rüdiger; Hledik, Juraj

doi:10.3390/risks6020054

Cited by 6 publications

(6 citation statements)

References 25 publications

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“…These are "concentration-stability" and "concentration-fragility" hypotheses. The "concentration-stability" hypothesis suggests that there is a significant association between bank concentration and financial stability through profitability channel (Berger, Klapper, & Turk-Aris, 2009;Vives, 2010;Berger & Bouwman, 2013), diversification channel (Frey & Hledik, 2018;Evrensel, 2008) and efficiency channel (Cifter, 2015). Using structural matrix approach on Brazilian data and Hirschman-Herfindahl index to proxy bank concentration Chang, Lima, Guerra, and Tabak (2008) concluded that a concentrated banking system is less prone to a financial crisis.…”

Section: Literature Reviewmentioning

confidence: 99%

The Role of Banking Concentration on Financial Stability

Antony¹,

Peter²,

Odhiambo³

2021

IJEF

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Globally, financial instability is a major source of concern among policy makers and bank regulators, particularly after the 2007-09 global financial crisis. Motivated by inconsistent theoretical evaluations on the impact of bank concentration on the likelihood of a systemic banking crisis, this paper investigates the role of bank concentration on financial stability in Kenya with competition as an intervening variable. The novelity of this study lies on the use of structural equation modeling (SEM) in the analysis of direct and indirect effects of bank concentration on financial stability. Results show that higher concentration induces banks to increase cost of service provision which may aggravate credit risks and expose banks to systemic risks. Further, competition plays a significant role in ensuring financial system stability which supports the ‘competition-stabiliy’ hypothesis. Uncompetitive banking industry may therefore provide incentive for banks to take excessive risks, which renders them vulnerable to systematic risks. We also establish that tight regulations enhances concentration and financial stability but hinders competition. These new insights give bank regulators and policy makers an incentive to formulate and implement the right policies to improve financial stability.

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Section: Literature Reviewmentioning

confidence: 99%

The Role of Banking Concentration on Financial Stability

Antony¹,

Peter²,

Odhiambo³

2021

IJEF

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“…We adopt the epidemic model splitting agents affected by idiosyncratic risk from those affected by systemic risk, as previously introduced. We aim to compare the effect of credit risk contagion on two different network structures: the basic model for random graphs, i.e., the Erdös-Rényi for different significant connection probabilities, the core-periphery network for different levels of balance between core nodes and periphery nodes [11], and the small-world networks (Watts-Strogatz networks) for increasing rewiring probability values. In our numerical experiments, we consider a network with 100 nodes in all simulations (it is worth noting that the number of nodes does not influence the results), each of them characterized by a given portfolio with random numbers of assets and correlations.…”

Section: Numerical Experimentsmentioning

confidence: 99%

“…As stated in a recent paper [11], the use of random graphs is motivated by the unobservable nature of real-world financial networks. Since the underlying financial network cannot be observed exactly, a probabilistic framework is needed.…”

Section: Introductionmentioning

confidence: 99%

Credit Risk Contagion and Systemic Risk on Networks

et al. 2019

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This paper proposes a model of the dynamics of credit contagion through non-performing loans on financial networks. Credit risk contagion is modeled in the context of the classical SIS (Susceptibles-Infected-Susceptibles) epidemic processes on networks but with a fundamental novelty. In fact, we assume the presence of two different classes of infected agents, and then we differentiate the dynamics of assets subject to idiosyncratic risk from those affected by systemic risk by adopting a SIIS (Susceptible-Infected1-Infected2-Susceptible) model. In the recent literature in this field, the effect of systemic credit risk on the performance of the financial network is a hot topic. We perform numerical simulations intended to explore the roles played by two different network structures on the long-term behavior of assets affected by systemic risk in order to analyze the effect of the topology of the underlying network structure on the spreading of systemic risk on the structure. Random graphs, i.e., the Erdös–Rényi model, are considered “benchmark” network structures while core-periphery structures are often indicated in the literature as idealized structures, although they are able to capture interesting, specific features of real-world financial networks. Moreover, as a matter of comparison, we also perform numerical experiments on small-world networks.

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“…A concentrated banking system is able to diversify its portfolio to earn more profits. For instance, using a simulation approach to examine the impact of asset portfolio diversification on financial stability in Austria, Frey and Hledik (2018) conclude that diversification at individual bank level improves financial stability. Furthermore, Fernandez et al (2010) in their study of 84 countries over the period 1980-2004 established that bank size matters when it comes to easy access of information and prevention of adverse selection problems.…”

Section: Previous Evidencementioning

confidence: 99%

Banking Concentration and Financial Stability: New Evidence from a Developing Country

2019

EJBM

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The policy debate on the trade-off and synergies between bank concentration and financial stability remains unresolved. Previous studies suggest two hypotheses; 'concentration-stability' and 'concentration-fragility'. This paper investigated the effect of bank concentration on financial stability in Kenya using Structural Equation Modelling (SEM) for the period 1990-2017. Estimation results reveal that high concentration leads to instability of the financial system. Further, increased competition improves stability of the financial system while regulation positively affects financial stability and bank concentration. Therefore, policies that ensures less bank concentration and enhance bank competition may significantly improve financial stability.

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Diversification and Systemic Risk: A Financial Network Perspective

Cited by 6 publications

References 25 publications

The Role of Banking Concentration on Financial Stability

The Role of Banking Concentration on Financial Stability

Credit Risk Contagion and Systemic Risk on Networks

Banking Concentration and Financial Stability: New Evidence from a Developing Country

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