Systemic Risk and Centrality Revisited:The Role of Interactions

Hossein Asgharian, Dominika Krygier and Anders Vilhelmsson
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Anders Vilhelmsson: Knut Wicksell Centre for Financial Studies, Lund University, Postal: Knut Wicksell Centre for Financial Studies, Lund University School of Economics and Management, P.O. Box 7082, S-220 07 Lund, Sweden
Authors registered in the RePEc Author Service: Anders Wilhelmsson

No 2019/1, Knut Wicksell Working Paper Series from Lund University, Knut Wicksell Centre for Financial Studies

Abstract: We suggest that banks contribute extensively to systemic risk only if they are both “risky” and centrally placed in the financial network. To calculate systemic risk we apply the ∆CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank’s contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for “risky” banks and overestimates the effect for “safer” banks.

Keywords: systemic risk; network centrality; loan syndication; ∆CoVaR; quantile regression (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-03-03
New Economics Papers: this item is included in nep-net and nep-rmg
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Working Paper: Systemic Risk and Centrality Revisited: The Role of Interactions (2019)
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