Networks and market-based measures of systemic risk: the European banking system in the aftermath of the financial crisis

Abstract

This article investigates the behaviour of the European banking system during the financial crises that occurred in the last decades. Among the various approaches for measuring systemic risk, we consider network analysis, which describes the linkages among financial institutions and their whole structure. We construct a time-varying network of the European banking system. Banks are linked to form a global interconnected system and they mutually influence one another in terms of risk. We model their reciprocal influence via a weighted and directed network, in which weights are related to risk measures that are based on equity returns. Then, we apply two network indicators to investigate the prominence of a bank in spreading and receiving risk from the others. The results enable us to capture many features of the banking system while identifying the global systemically important banks. Moreover, the results of the analysis over time show how interconnections change over periods that are characterized by various economic scenarios.