Community Structure and Systemic Risk of Bank Correlation Networks Based on the U.S. Financial Crisis in 2008

Yajing Huang,Feng Chen

doi:10.3390/a14060162

Yajing Huang, Feng Chen

Open Access

https://doi.org/10.3390/a14060162

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Abstract

This paper studies the community structure of the bank correlation network in the financial system and analyzes the systemic risk of the community sub-networks. Based on the balance sheet data of U.S. commercial banks from 2008, we establish a bank correlation network for each state according to the banks’ investment portfolio ratio. First, we analyze the community structure of each bank’s correlation network and verify the effectiveness of the community division from the point of view of the importance of nodes. Then, combining the data of failed banks after the 2008 financial crisis, we find that for small communities, the financial systemic risk will appear to have obvious volatility, and it is quite likely to reach an extremely high level. With the increase in the number of nodes in the community, systemic risk will tend towards a stable and low level. Furthermore, if only communities with failed banks are considered, the regression analysis shows that systemic risk and the size of the community almost follow a power law distribution trend. These results reveal the importance of supervising the banking system at the level of community sub-networks, which has certain guiding significance for the stability of the financial system.

Highlights

This paper studies the community structure of the bank correlation network in the financial system and analyzes the systemic risk of the community sub-networks
Once a complex financial network is formed, the collapse of some institution nodes spreads through the network, which puts neighboring institutions at risk and causes more institutions to fall into crisis, gradually promoting the spread of financial risk
This financial crisis highlighted the complex interconnections between financial institutions, which may provide the channel for risk contagion, thereby promoting the occurrence of systemic risk

Summary

Introduction

This paper studies the community structure of the bank correlation network in the financial system and analyzes the systemic risk of the community sub-networks. If only communities with failed banks are considered, the regression analysis shows that systemic risk and the size of the community almost follow a power law distribution trend These results reveal the importance of supervising the banking system at the level of community sub-networks, which has certain guiding significance for the stability of the financial system. Once a complex financial network is formed, the collapse of some institution nodes spreads through the network, which puts neighboring institutions at risk and causes more institutions to fall into crisis, gradually promoting the spread of financial risk. The risk first spread to the entire mortgage market gradually spread to other financial markets, forming a global financial crisis [3] This financial crisis highlighted the complex interconnections between financial institutions, which may provide the channel for risk contagion, thereby promoting the occurrence of systemic risk.

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