Abstract
This study examines fifteen major banks’ network connectedness in the Nigerian banking system via its stock returns. The paper studies both the static and dynamic network connectedness of banks built on the generalized forecast error variance decomposition, using daily data from January 4, 2005, to June 28, 2019, of publicly traded banks. This study finds a substantial total connectedness, with a high pairwise connectedness among the system’s large banks. The dynamic evolution of connectedness in the network reveals that banks’ connectivity increases in response to certain economic episodes. The evolution of the global network's topological properties reveals that it is mainly susceptible to shocks threatening its stability. Additionally, the study computes a composite index of systemic importance for the Nigerian banking system by combining several network centrality metrics using the principal component analysis. The outcome shows that large banks are more centralized in the network, and the larger the scale of assets a bank has, the more systemically relevant the bank is in the network. Since systemic risk emanates from connectedness, frequent assessment of the banking system's connectedness and systemic importance will aid policy decisions. The proposed measure of systemic importance can be incorporated into the CBN’s stress testing mechanism for fast-tracking risk potential banks.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.