Financial risk contagion based on dynamic multi-layer network between banks and firms

Qichao Jin, Lei Sun, Yanyu Chen and Zhao-Long Hu

Physica A: Statistical Mechanics and its Applications, 2024, vol. 638, issue C

Abstract: Banks and firms play pivotal roles within the financial system and serve as primary channels for systemic risk contagion. While progress has been made in understanding risk contagion within financial network systems, many studies tend to overlook the intricate interplay of multi-channel risk transmission and the dynamic evolution of network structures. Leveraging complex network theory, we have developed a dynamic multi-layer financial network risk transmission model that encompasses traditional bank–firm lending relationships and incorporates dynamic short-term loans. Through our analysis of various parameters such as loan recovery ratios, cross-shareholding ratios, network structures, short-term loan ratios, and attack strategies, we have made significant observations: In scenarios where both the interbank lending network and cross-shareholding network among firms exhibit random network structure, the financial network presents the highest level of risk. Excessive deviations in network average degrees, either too high or too low, can also heighten network vulnerability. An increase in the recovery ratio of interbank loans and the cross-shareholding ratio among firms corresponds to an escalation in systemic risk. Nodes with higher lending assets, more liquid assets, greater total assets, or higher out-degrees within the network become significant contributors to an elevated network bankruptcy rate when subjected to targeted attacks. Notably, the dynamic short-term loan network significantly amplifies systemic risks, with this amplification effect intensifying as the scale of short-term loans increases. From both macro and micro perspectives, our findings furnish regulatory authorities with novel analytical tools and insights to effectively mitigate and manage systemic risks in the financial sector.

Keywords: Complex networks; Financial risk contagion; Bank–firm financial network; Dynamic multi-layer networks; Short-term loan (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:638:y:2024:i:c:s0378437124001328

DOI: 10.1016/j.physa.2024.129624

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