Measuring Financial Integration: The Network Approach

Abstract

While deeper financial integration is often considered conducive to the efficient allocation of resources and risk sharing, an increasingly important policy concern is whether it brings greater vulnerability to shocks. To address the latter concern, this paper uses a different approach to measuring financial integration, highlighting interconnectedness in a network of financial flows. Applying an adapted version of eigenvector centrality, often used in network analysis, the new measure provides a nuanced picture of financial integration and interconnectedness in the global and regional financial networks. The United States and the United Kingdom remain the ‘core’ in the global banking network, with all other countries scattered in the ‘periphery’. With China rapidly integrating with the region, the Asian banking network increasingly resembles the structure of the global network. This is the beginning of essential work to discover whether such network structures pose an added threat of shock transmission around the region.