Identification of Systemically Important Banks Using Network Theory

Adam Banai, András Kollarik and András Szabó-Solticzky
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András Kollarik: Magyar Nemzeti Bank
András Szabó-Solticzky: Institute of Mathematics, Eötvös Loránd University

Research in Economics and Business: Central and Eastern Europe, 2014, vol. 6, issue 2

Abstract: Identification of systemically important financial institutions became a major issue in the wake of the global financial crisis. Both supervision and lender of last resort activity need supporting tools to determine systemic importance of individual institutions. Several countries are using indicator-based methods in the identification of systemic importance which focuses on market shares of each bank in different fields of banking. In this paper our main objective was the extension of these methods using measures of network theory. The position of an institution in the financial network and the characteristics of its partners may enhance the possible contagious effects of its default. We constructed an index that contains this information and can be simply inserted into indicator-based methods. Using market indicators we tested our index on the Hungarian FX swap market and we found that our new index is a good tool for the identification of systemically important institutions. Our analysis also highlighted that during the most intensive period of the crisis some foreign banks’ relevance increased significantly, which helped to ease the tension in the market.

Date: 2014
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