Multilayer bank-firm networks and financial risk contagion

Jingyue Lei, Peilong Shen and Zhinan Li

Physica A: Statistical Mechanics and its Applications, 2025, vol. 675, issue C

Abstract: We develop a multilayer bank-firm network model incorporating five types of linkages: interbank lending, bank-firm credit, interfirm trade credit, interfirm guarantees, and cross-holdings between banks and firms. Through computational experiments, we simulate various external shocks—including individual bank shocks, multiple-firm shocks, asset shocks, and macroeconomic shocks—to examine the mechanisms of financial risk contagion within the bank-firm network and assess the resultant losses across different network layers. Our findings indicate the following: The failure of a single bank primarily propagates to other banks through the interbank lending network and the bank-firm cross-holding network. Multiple-firm shocks lead to an increase in firm bankruptcy which spreads through the trade credit network between firms, and the risk of firm default will also be transmitted to banks via the bank-firm credit network. In the presence of asset shocks, bank failures predominantly spread through the bank-firm cross-holding network. Under macroeconomic shocks, the bank-firm cross-holding network incurs the most significant losses, followed by the bank-firm credit network, whereas the interfirm trade credit and interbank lending networks experience comparatively minor losses. Furthermore, banks exhibit greater sensitivity to asset shocks, and risks originating from a single bank can propagate bidirectionally to firms. Micro-level shocks result in more severe financial losses than macroeconomic shocks. Notably, the interfirm guarantee network functions as a risk buffer, mitigating contagion between banks and firms.

Keywords: Complex networks; Bank-firm system; Financial risk contagion; Dynamic multi-layer networks (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:675:y:2025:i:c:s037843712500490x

DOI: 10.1016/j.physa.2025.130838

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