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Systemic Risk and Centrality Revisited: The Role of Interactions

Asgharian, Hossein LU ; Krygier, Dominika LU and Wilhelmsson, Anders LU (2019) In Working Papers
Abstract
We suggest that banks contribute extensively to systemic risk only if they are both "risky" and centrally placed in the financial network. To calculate systemic risk we apply the CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank's contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank... (More)
We suggest that banks contribute extensively to systemic risk only if they are both "risky" and centrally placed in the financial network. To calculate systemic risk we apply the CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank's contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for "risky" banks and overestimates the effect for "safer" banks. (Less)
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author
; and
organization
publishing date
type
Working paper
publication status
published
subject
keywords
systemic risk, network centrality, loan syndication, CoVaR, G18, G21
in
Working Papers
issue
2019:4
pages
38 pages
language
English
LU publication?
yes
id
43548e7e-3dca-44a6-aa97-4dfe36390e2c
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2019_004.htm
date added to LUP
2019-03-07 13:26:30
date last changed
2019-03-07 14:39:57
@misc{43548e7e-3dca-44a6-aa97-4dfe36390e2c,
  abstract     = {We suggest that banks contribute extensively to systemic risk only if they are both "risky" and centrally placed in the financial network. To calculate systemic risk we apply the CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank's contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for "risky" banks and overestimates the effect for "safer" banks.},
  author       = {Asgharian, Hossein and Krygier, Dominika and Wilhelmsson, Anders},
  language     = {eng},
  note         = {Working Paper},
  number       = {2019:4},
  series       = {Working Papers},
  title        = {Systemic Risk and Centrality Revisited: The Role of Interactions},
  url          = {https://swopec.hhs.se/lunewp/abs/lunewp2019_004.htm},
  year         = {2019},
}