Network externalities across financial institutions
Carlos Castro Iragorri (),
Juan S. Ordoñez () and
Sergio Preciado ()
Documentos de Trabajo from Universidad del Rosario
We propose and estimate a financial distress model that explicitly accounts for the interactions or spill-over effects between financial institutions, through the use of a spatial continuity matrix that is build from financial network data of interbank transactions. Such setup of the financial distress model allows for the empirical validation of the importance of network externalities in determining financial distress, in addition to institution specific and macroeconomic covariates. The relevance of such specification is that it incorporates simultaneously micro-prudential factors (Basel 2) as well as macro-prudential and systemic factors (Basel 3) as determinants of financial distress. Results indicate network externalities are an important determinant of financial health of a financial institutions. The parameter that measures the effect of network externalities is both economically and statistical significant and its inclusion as a risk factor reduces the importance of the firm specific variables such as the size or degree of leverage of the financial institution. In addition we analyse the policy implications of the network factor model for capital requirements and deposit insurance pricing.
Keywords: systemic risk; network models; spatial econometrics (search for similar items in EconPapers)
JEL-codes: C21 C58 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:col:000092:014287
Access Statistics for this paper
More papers in Documentos de Trabajo from Universidad del Rosario
Bibliographic data for series maintained by Facultad de Economía ().