Abstract
The notions of systemic importance and systemic risk of financial institutions are closely related to the topology of financial liability networks. In this work, we reconstruct and analyze the financial liability network of an entire economy using data of 50,159 firms and banks. Our analysis contains 80.2% of the total liabilities of firms towards banks and all interbank liabilities in the Austrian banking system. The combination of firm-bank networks and interbank networks allows us to extend the concept of systemic risk to the real economy. In particular, the systemic importance of individual companies can be assessed, and for the first time, the financial ties between the financial and the real economy become explicitly visible. We find that firms contribute to systemic risk in similar ways as banks do. We identify a set of mid-sized companies that carry substantial systemic risk. Their default would affect up to 40% of the Austrian financial market. We find that all firms together create more systemic risk than the entire financial sector. In 2008, the total systemic risk of the Austrian interbank network amounted to only 29% of the total systemic risk of the entire financial network consisting of firms and banks. The work demonstrates that the notions of systemically important financial institutions (SIFIs) can be directly extended to firms.
Highlights
The financial crisis of 2007–2008 was triggered by the default of a single investment bank
We find Q2 = 0.29 in Austria for 2008, that is the total systemic risk of the interbank network amounts to only 29% of the total systemic risk of the entire liability network
The systemic importance of financial institutions is closely related to the topology of financial liability networks
Summary
The financial crisis of 2007–2008 was triggered by the default of a single investment bank. A few works have studied the detailed relations between the financial and the real economy empirically These focused on Japan and were mainly concerned with the topology of credit networks between banks and large firms [26,27,28,29]. We reconstruct the network by combing datasets that contain annual financial statements of most firms and banks in Austria (approximately 170,000 firms and close to 1000 banks) with anonymized interbank liabilities from the Austrian banking system. This combined financial network of firms and banks allows us to identify systemically important firms by extending DebtRank to the combined financial networks. We reconstruct the liability network of 796 banks and 49,363 firms that contains 80.2% of the total liabilities of firms towards banks and all interbank liabilities
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