Research on sovereign credit and international banking industry tail risk contagion ----Perspective from double-layer complex network

Gong Xiao-Li, Wu Zhuo-Cheng, Xiong Xiong and Zhang Wei

International Review of Economics & Finance, 2025, vol. 99, issue C

Abstract: Since the European debt crisis, the international banking industry and sovereign debt markets have experienced frequent crises. In particular, the dynamic complexity of the cross-contagion between tail risks in the international banking industry and sovereign credit risks has intensified under the influence of extreme events. To clarify the cross-contagion patterns between sovereign risks and banking risks, this paper constructs a complex network analysis framework for sovereign credit-international banking industry risk connectedness based on complex network methods. Primarily, the paper explores the tail risk contagion between the international banking industry and sovereign credit risks by calculating the risk contagion matrix for the entire period. Then, the double-layer risk spillover complex network is constructed, and the roles played by each country in the risk transmission network are analyzed from the perspective of network topological indicators. In particular, the paper analyzes the impact of international extreme events on the double-layer risk spillover network. Ultimately, the paper discusses the impact of double-layer network connectedness on sovereign credit risk. The research finds that the tail risk transmission between international sovereign credit risk and the banking industry is bi-directional. And the transmission direction is mainly from the sovereign credit layer to the banking industry layer from the perspective of the entire period. The cross-layer transmission characteristics of cross-contagion risks are inconsistent at different stages, and the roles played by countries in the network are significantly different. In addition, tail events have a strong impact on the cross-contagion of risks. The research conclusions provide ideas for the international community to deal with the cross-contagion of banking industry-sovereign credit risks.

Keywords: Risk spillover; Sovereign credit risk; Banking industry risk; Double-layer complex network; Network topology structure (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:99:y:2025:i:c:s1059056025001558

DOI: 10.1016/j.iref.2025.103992

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