Bank Networks from Text: Interrelations, Centrality and Determinants

In the wake of the still ongoing global financial crisis, bank interdependencies have come into focus in trying to assess linkages among banks and systemic risk. To date, such analysis has largely been based on numerical data. By contrast, this study attempts to gain further insight into bank interconnections by tapping into financial discourse. We present a text-to-network process, which has its basis in co-occurrences of bank names and can be analyzed quantitatively and visualized. To quantify bank importance, we propose an information centrality measure to rank and assess trends of bank centrality in discussion. For qualitative assessment of bank networks, we put forward a visual, interactive interface for better illustrating network structures. We illustrate the text-based approach on European Large and Complex Banking Groups (LCBGs) during the ongoing financial crisis by quantifying bank interrelations and centrality from discussion in 3M news articles, spanning 2007Q1 to 2014Q3.Comment: Quantitative Finance, forthcoming in 201

What is the Minimal Systemic Risk in Financial Exposure Networks?

Management of systemic risk in financial markets is traditionally associated with setting (higher) capital requirements for market participants. There are indications that while equity ratios have been increased massively since the financial crisis, systemic risk levels might not have lowered, but even increased. It has been shown that systemic risk is to a large extent related to the underlying network topology of financial exposures. A natural question arising is how much systemic risk can be eliminated by optimally rearranging these networks and without increasing capital requirements. Overlapping portfolios with minimized systemic risk which provide the same market functionality as empirical ones have been studied by [pichler2018]. Here we propose a similar method for direct exposure networks, and apply it to cross-sectional interbank loan networks, consisting of 10 quarterly observations of the Austrian interbank market. We show that the suggested framework rearranges the network topology, such that systemic risk is reduced by a factor of approximately 3.5, and leaves the relevant economic features of the optimized network and its agents unchanged. The presented optimization procedure is not intended to actually re-configure interbank markets, but to demonstrate the huge potential for systemic risk management through rearranging exposure networks, in contrast to increasing capital requirements that were shown to have only marginal effects on systemic risk [poledna2017]. Ways to actually incentivize a self-organized formation toward optimal network configurations were introduced in [thurner2013] and [poledna2016]. For regulatory policies concerning financial market stability the knowledge of minimal systemic risk for a given economic environment can serve as a benchmark for monitoring actual systemic risk in markets.Comment: 25 page

Early-warning signals of topological collapse in interbank networks

The financial crisis clearly illustrated the importance of characterizing the level of 'systemic' risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998-2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear - but unpredictable - signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.Comment: 28 pages, 23 figures, 1 tabl

The Brazilian Interbank Network Structure and Systemic Risk

We explore the structure and dynamics of interbank exposures in Brazil using a unique data set of all mutual exposures of financial institutions in Brazil, as well as their capital reserves, at various periods in 2007 and 2008. We show that the network of exposures can be adequately modeled as a directed scale-free (weighted) graph with heavy-tailed degree and weight distributions. We also explore the relationship between connectivity of a financial institution and its capital buffer. Finally, we use the network structure to explore the extent of systemic risk generated in the system by the individual institutions.

Analysis of Global Banking Network

The outbreak of the Global Pandemic Covid-19 that spread terribly across various countries from the end of 2019, has severely altered people’s life and economy. Various reports across papers and news articles on how each government was managing the costs of vaccines, medical equipment, and necessities. The world saw shifts in stock markets, unemployment, the tourism industry completely coming to a standstill, and more. Has this Covid Pandemic which played a crucial role within geographical boundaries altered the financial transactions across countries on a higher level? With the help of the statistics available with the Bank of International Settlements, this project aims to analyze the cross-border lending pattern across countries. This can be analyzed with the help of Complex Network analysis. The network reflects the data where the nodes are the countries and bilateral links correspond to credit linkages. Using various topological network measures such as Degree, Strength, Clustering coefficient, and Polya Filter, we can analyze the financial interconnectedness and the possibility of change in network patterns during times of crisis such as Covid-19. This will help to find a correlation between this sudden worldwide crisis and the lending market among banks

What is the Minimal Systemic Risk in Financial Exposure Networks? INET Oxford Working Paper, 2019-03

Management of systemic risk in financial markets is traditionally associated with setting (higher) capital requirements for market participants. There are indications that while equity ratios have been increased massively since the financial crisis, systemic risk levels might not have lowered, but even increased (see ECB data 1 ; SRISK time series 2 ). It has been shown that systemic risk is to a large extent related to the underlying network topology of financial exposures. A natural question arising is how much systemic risk can be eliminated by optimally rearranging these networks and without increasing capital requirements. Overlapping portfolios with minimized systemic risk which provide the same market functionality as empir- ical ones have been studied by Pichler et al. (2018). Here we propose a similar method for direct exposure networks, and apply it to cross-sectional interbank loan networks, consisting of 10 quarterly observations of the Austrian interbank market. We show that the suggested framework rearranges the network topol- ogy, such that systemic risk is reduced by a factor of approximately 3.5, and leaves the relevant economic features of the optimized network and its agents unchanged. The presented optimization procedure is not intended to actually re-configure interbank markets, but to demonstrate the huge potential for systemic risk management through rearranging exposure networks, in contrast to increasing capital requirements that were shown to have only marginal effects on systemic risk (Poledna et al., 2017). Ways to actually incentivize a self-organized formation toward optimal network configurations were introduced in Thurner and Poledna (2013) and Poledna and Thurner (2016). For regulatory policies concerning financial market stability the knowledge of minimal systemic risk for a given economic environment can serve as a benchmark for monitoring actual systemic risk in markets

Bank-specific characteristics and monetary policy transmission: the case of Italy,

This paper tests cross-sectional differences in the effectiveness of the bank lending channel of monetary policy in Italy from 1986 to 1998 using a panel approach. After a monetary tightening the decrease in deposits subject to reserve requirements is sharper for those banks that have less incentive to shield the effect of a monetary squeeze: small banks characterized by a higher ratio of deposits to loans and well-capitalized banks that have a greater capacity to raise other forms of external funds. As to lending, size does not affect the banks' reaction to a monetary policy impulse. This can be explained by a closer customer relationship, which provides an incentive for small banks, which are more liquid on average, to smooth the effects of a tightening on credit supplied. Banks' liquidity is the most significant factor enabling them to attenuate the effect of a decrease in deposits on lending. JEL Classification: E44, E51, E52bank lending channel, monetary policy, transmission mechanisms