Topological properties of reconstructed credit networks and banking systemic risk

Chao Wang, Xiaoxing Liu, Boyi Chen and Menyu Li

The North American Journal of Economics and Finance, 2023, vol. 66, issue C

Abstract: Financial bipartite networks provide channels for contagion risks and their topological properties determine financial stability. We enrich the bipartite network reconstruction methods proposed by Ramadiah et al. (2020) and extend them to the Chinese banking system. By comparing the reproducibility of the real credit market and the corresponding systemic risk, the impact of topological properties for different reconstructed bipartite networks on financial stability is analyzed. The empirical evidence shows that network reconstruction methods based on maximum entropy ensembles capture more properties in the real credit network. It also highlights that the different systemic risk level is mainly contributed by the topological properties based on common exposures. These analyses for topological properties provide regulatory insights for systemic risk prevention. It shows that reducing credit similarity across banks while increasing credit diversification in different sectors helps to control systemic risk. The results imply the possibility of increasing financial stability through the macro-regulation of the credit market structure.

Keywords: Network reconstruction; Systemic risk; Bipartite credit network; Fire sales (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:66:y:2023:i:c:s1062940823000360

DOI: 10.1016/j.najef.2023.101913

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