The global financial system has become increasingly interconnected and complex, leading to the recognition that existing models, measures, and reports of financial risk are inadequate in capturing important systemic dimensions. In response to this realization, advisory boards have recently been established at high levels, and regulations are now directly targeting systemic risk. As a result, an increasing number of researchers are turning to network analysis as a means to model systemic risk in financial networks. However, most current approaches focus on interbank payment network flows at the national and international level. This study aims to address this gap by introducing a novel approach to assess systemic risk at the micro level. Specifically, the authors analyze intra-bank financial risk interconnections by examining the real case of a "cheques-as-collateral" network for a major Greek bank. By doing so, they provide valuable insights into the negative spillover effects that disruptions can have on a financial entity within a bank's lending network. The proposed model not only complements existing credit scoring models that primarily consider individual customer's financial profiles but also offers useful information for regulatory authorities in assessing more accurate estimates of systemic risk. The methodology presented in this study can be applied across various segments of the entire financial system, making it a valuable tool for regulators seeking to enhance their understanding and management of systemic risk. Overall, this research contributes to the ongoing efforts aimed at improving our understanding of systemic risk in the global financial system. By focusing on micro-level analysis and considering intra-bank interconnections, it provides new insights into potential sources of systemic risk that may have been overlooked by previous studies.
The global financial system is a complicated network of connections between different banks and financial institutions. Existing ways of measuring and reporting on the risk in this system are not good enough. People in charge and rules are trying to prevent big problems that could affect the whole system. They use network analysis to understand how risks spread through these connections. Right now, they mostly look at how money moves between banks within a country or internationally. This study suggests a new way to look at risk by focusing on one bank's specific connections using checks as collateral. It shows how problems in one part of a bank's lending network can affect other parts. This new model can help regulators get better information about risks and be used for different parts of the financial system. The research helps us understand more about how risks can affect the whole global financial system."
Definitions
- Global: Something that happens all around the world.
- Financial system: The way money moves between banks and other organizations.
- Interconnected: When things are connected or linked together.
- Inadequate: Not good enough or not sufficient.
- Systemic risk: The possibility that something bad happening in one part of the financial system will affect other parts too.
- Network analysis: Studying how things are connected to each other in a network.
- Micro level: Looking at something very closely or specifically, like just one bank's connections instead of looking at all banks together.
- Insights: Understanding or knowledge gained from studying something.
- Spillover effects: When
Understanding Systemic Risk in the Global Financial System: A Novel Approach to Assessing Intra-Bank Interconnections
The global financial system has become increasingly interconnected and complex, leading to the recognition that existing models, measures, and reports of financial risk are inadequate in capturing important systemic dimensions. In response to this realization, advisory boards have recently been established at high levels, and regulations are now directly targeting systemic risk. As a result, an increasing number of researchers are turning to network analysis as a means to model systemic risk in financial networks.
Current Approaches
Most current approaches focus on interbank payment network flows at the national and international level. While these studies provide valuable insights into potential sources of systemic risk across various segments of the entire financial system, they tend to overlook micro-level analysis which can be equally important for understanding how disruptions can spread throughout a bank's lending network.
A Novel Approach
This study aims to address this gap by introducing a novel approach to assess systemic risk at the micro level. Specifically, the authors analyze intra-bank financial risk interconnections by examining the real case of a "cheques-as-collateral" network for a major Greek bank. By doing so, they provide valuable insights into the negative spillover effects that disruptions can have on a financial entity within a bank's lending network. The proposed model not only complements existing credit scoring models that primarily consider individual customer's financial profiles but also offers useful information for regulatory authorities in assessing more accurate estimates of systemic risk.
Implications
The methodology presented in this study can be applied across various segments of the entire financial system, making it a valuable tool for regulators seeking to enhance their understanding and management of systemic risk. Overall, this research contributes to the ongoing efforts aimed at improving our understanding of systemic risk in the global financial system. By focusing on micro-level analysis and considering intra-bank interconnections, it provides new insights into potential sources of systemic risk that may have been overlooked by previous studies.
The global financial system has become highly connected and complex. Has been proven in practice that existing models, measures and reports of financial risk fail to capture some important systemic dimensions. Only lately, advisory boards have been established in high level and regulations are directly targeted to systemic risk. In the same direction, a growing number of researchers employ network analysis to model systemic risk in financial networks. Current approaches are concentrated on interbank payment network flows in national and international level. This work builds on existing approaches to account for systemic risk assessment in micro level. Particularly, we introduce the analysis of intra-bank financial risk interconnections, by examining the real case of "cheques-as-collateral" network for a major Greek bank. Our model offers useful information about the negative spillovers of disruption to a financial entity in a bank's lending network and could complement existing credit scoring models that account only for idiosyncratic customer's financial profile. Most importantly, the proposed methodology can be employed in many segments of the entire financial system, providing a useful tool in the hands of regulatory authorities in assessing more accurate estimates of systemic risk.
