How to measure interconnectedness between banks, insurers and financial conglomerates

Abstract

Financial institutions’ interconnectedness is a key component of systemic risk. However there is still no consensus on its measurement. Using a unique database of network of exposures of French financial institutions, we compare three strategies to measure interconnectedness: closeness of exposure distributions, identification of core-periphery structure and contagion models. The closeness of exposure distributions is adequate to identify outlier institutions. The “core-periphery” structure, usually applied to banking network, is still valid with insurance companies. However this approach is not immune to size effect. This result contrasts with previous analyses where size was not accounted for. Contagion-based stress-tests are the best suited to capture institutions’ systemic fragility, emphasizing their importance as a supervisory tool.

Interconnectedness of Financial Conglomerates

“…We compare the interconnectedness between financial institutions using two concepts: network integration and network substitutability (see Hauton and Héam [7]). Two institutions are said to be close in terms of network integration when they have similar exposures independent of their counterparts.…”

“…In line with these two concepts, Hauton and Héam [7] propose two metrics to quantify each dimension. These metrics are derived from a statistical background that goes beyond the scope of this paper (see Appendix B for more details).…”

“…The French financial sector presents an interesting situation, since it includes several major financial conglomerates. Our paper is an extended version of the second part of the working paper Hauton and Héam [7]. The first part of the working paper provides a comparison of several methodologies to measure the interconnectedness between financial institutions on a consolidated basis (such as the identification of core-periphery structure, for instance).…”

“…Section 3 presents the database. It heavily relies on Hauton and Héam [7]. Section 4 uses statistical measures of exposure closeness in order to assess to what extent the insurer parts of conglomerates are different from pure insurers.…”

https://www.asianinstituteofresearch.org/JEBarchives/Comparison-Between-Risk-and-Return-of-Financial-Conglomerates-in-Indonesia%3A-Vertical%2C-Horizontal-and-Mixed-(TOPSIS-Analysis)

“…Research on financial conglomerates has been conducted. There were researches on the benefits and risks of the existence of financial conglomerates like research on the regulation and supervision of financial conglomerates (Freixas, Lóránth, and Morrison, 2007); (Peleckienė, 2011); (Mälkönen, 2009), controversy about the economic value of financial conglomerates (Schmid and Walter, 2009); (Lelyveld and Knot, 2009); (Gatzert and Schmeiser, 2011); (Elyasiani, Staikouras, and Dontis-charitos, 2014); (Guerry and Wallmeier, 2017); and the interconnection between banks, insurance and financial conglomerates (Hautona and Jean-CyprienHéam, 2016). Based on the research above, it could be concluded the economic benefits of financial conglomerates still being research to test consistency about the benefits or risks of financial conglomerates.…”