Bank–insurer–firm tripartite interconnectedness of credit risk exposures in a cross-shareholding network

Abstract

This study assesses the interconnectedness of credit risk exposures in a tripartite network of cross-shareholdings among banks, insurers, and firms in Japan’s stock market during the fiscal years 2008–2015. We use consistent measures: credit risk exposure by PD (probability of default)/LGD (loss given default) approach in Basel III and RORA (return on risk-weighted assets). We conduct a credit risk analysis of the risk exposures in the cross-shareholdings. The result shows that by following the PD/LGD approach, the credit risk weights become approximately 1.5–5 times as large as by the transitional risk weight method. The mean exposure-weighted risk for the firm’s shareholdings is 1.67 times as large as the bank’s and the insurer’s. We analyze the network structure of the cross-shareholdings using network centrality measures. Our analysis can provide each entity with important implications on credit risk management in their cross-shareholdings.