Credit Risk Transmission Research Articles

Does BRRD mitigate the bank-to-sovereign risk channel?

We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the transmission of credit risk from banks to their sovereign, using CDS spreads to capture bank and sovereign credit risk for a sample of 43 banks in 8 Euro Area countries over the period 2009-2020. If the BRRD bail-in framework is credible, changes in bank default risk should not be transmitted to sovereign risk. In a novel approach we use banks earnings announcements to identify exogenous shocks to bank credit risk and investigate to what extent bank risk is transmitted to sovereign risk before and during the BRRD era. We find that bank-to-sovereign risk transmission has diminished after the introduction of the BRRD, suggesting that financial markets judge the BRRD framework as credible. The decline in bank-sovereign risk transmission is particularly significant in the periphery Euro Area countries, especially Italy and Spain, where the bank-sovereign nexus was most pronounced during the sovereign debt crisis. We report that the lower bank-to-sovereign credit risk transmission is associated with the parliamentary approval of the BRRD and not with the OMT program launched by the ECB to affect sovereign yield spreads, nor with specific bail-in or bailout cases which occurred during the BRRD era. Finally, we document that the reduction in risk transmission is most pronounced for banks classified as a Global Systemically Important Bank (G-SIB), stressing the importance of additional capital buffers imposed by Basel III.

European bank credit risk transmission during the credit Suisse collapse

The effect of Credit Suisse collapse on the credit risk spillover across banks is understudied and unclear. Using the tail-event and network dynamics framework on weekly data covering 15 large European banks from March 11, 2020 to March 28, 2023, we show that the credit risk has a strong spillover effect on major banks, increasing systemic risk significantly after the collapse of Credit Suisse. This is notable for non-EU (Swiss and UK) banks in the post-collapse era. The findings are useful for policymakers and regulators concerned with contagious credit risk and the stability of the banking sector under extreme events.

European systemic credit risk transmission using Bayesian networks

The analysis of systemic credit risk is one of the most important concerns within the financial system. Its complexity lies in adequately measuring how the transmission of systemic default spreads through assets or financial markets. The transmission structure of systemic credit risk across several European sectoral CDS is studied by dynamic Bayesian networks. The new approach allows for a more advanced analysis of systemic risk transmission, including long-term and more complex relationships. The modelling reveals as relevant only relationships between the original series and one- and two-lagged series. Network structure learning displays a robust and stationary underlying risk transmission structure, pointing to a consolidated transmission mechanism of systemic credit risk between CDSs. Between 5 % and 40 % of sectoral CDS series variances are explained by the network relationships. The modelling allows us to ascertain which relationships between the CDS series show positive (amplifier) and negative (reducer) effects of systemic risk transmission.

Interbank Network as a Channel of Credit Contagion in Banks: Is Moral Hazard Transferable?

Abstract The objective of this research is to examine the inter-bank network of clients as a channel for credit risk transmission by groups of banks in Serbia characterized by different levels of credit risk (clusters). Two of the four observed groups of banks have experienced increase in NPLs through the channel of contagion spread in the interbank network. The spread of the infection through the banking network is a consequence of the impact of the economic connection among clients. The third group of banks (banks with high levels of credit risk) takes over the effects of systemic factors and transfers their influence to the second and the first group (banks with average and below-average credit risk level) through the banking network channel. There were different models of bank behaviour, from a group of banks that fully aligned their risk taking with risk capacity to a group of banks that exhibited an excessive risk propensity far beyond their own risk-taking capacity. There is also the confirmation that moral hazard was an important determinant of credit risk and an additional impulse to spread credit contagion.

Credit risk interdependence in global financial markets: Evidence from three regions using multiple and partial wavelet approaches

Credit risk linkage has primarily been examined from the lens of developed country markets and using volatility index. In this paper, we investigate the interconnectedness and causality among the global financial market risks during crisis periods, using partial and multiple wavelet coherence analysis. Specifically, we employ financial sector credit default swap indices from three regions (Asia, North America, and Europe) from January 2008 to June 2021 as a proxy for risk in the financial industry. The sample period includes three global crises, namely the 2008 global financial crisis, the European debt crisis, and the current coronavirus disease of 2019 pandemic. Our findings can be summarized as follows. First, credit risks in global financial markets are highly connected across the three regions. However, if the impact of a particular region is not considered, the other two regions become less connected in terms of credit risk. Second, considerable interactions among the credit risk of financial industries in the three regions occur during crisis periods. Third, significant relationships between credit risks in Asia and North America ensue in the long-term, which is independent of the European region. Our findings provide significant implications for financial market participants, as the credit risk transmission can directly affect not only financial market stability but also portfolio risk exposure.

It’s not time to make a change: Sovereign fragility and the corporate credit risk

Relying on a perspective borrowed from monetary policy announcements and introducing an econometric twist in the traditional event study analysis, we document the existence of an “event risk transfer”, namely a significant credit risk transmission from the sovereign to the corporate sector after a sovereign rating downgrade. We find that after the delivery of the downgrade, corporate CDS spreads rise by 36% per annum and there is a widespread contagion across countries, in particular among those which were most exposed to the sovereign debt crisis. This effect exists on top of the standard relation between sovereign and corporate credit risk.

Research on influencing factors and transmission mechanisms of green credit risk.

Controlling green credit risk is conducive to increasing the confidence of financial institutions, improving the enthusiasm of enterprises for green innovation, and promoting the sustainable development of green credit and the high-quality development of green economy. This paper puts government intervention, green technology innovation, and regulatory action into the same theoretical framework and puts forward the green credit risk transmission mechanisms which involve the transmission relationship and transmission path on the basis of the influencing factors. Then, this research uses stationary time series data (from the "China Statistical Yearbook," the "Statistical Yearbook" of various provinces, the annual reports of listed companies, etc.) to analyze the current situation of green credit risk in different regions. From the systematic perspective, this study verifies the transmission path of green credit risk and tests the rationality and effectiveness of the green credit risk transmission mechanisms. The research shows that the management of green credit risk requires the active actions of government departments, financial institutions, green enterprises, and regulatory departments.

Heuristic Algorithm for Cross‐Platform Credit Risk Transmission Based on Hybrid Strategies

Credit risk transmission between cross‐platforms is an important issue in the construction of a credit service system. The effect of credit risk transmission between credit entities (nodes) is analyzed in this paper. A heuristic algorithm based on hybrid strategies (HAHS) is proposed to find risk transmission paths and calculate the influence of nodes. Besides, a novel community model is applied to predict the credit risk areas in advance. In detail, the mathematical association structure between credit entities is firstly given in the algorithm, and the breadth first search algorithm is used to find the hierarchical nodes on the credit risk transmission paths. Then, the characteristics of credit risk transmission are analyzed, and the calculation methods of single‐path and multipath influence are proposed. Finally, the credit entities are divided into communities based on a greedy strategy considering the characteristics of the credit entity association structure. The threshold control strategy is adopted to find global key nodes among all of the entities and local key nodes in communities, respectively, so as to realize the early warning of credit risk.

Sovereign debt holdings and banks’ credit risk: Evidence from the Eurozone

This paper investigates the direct effect of sovereign debt holding on banks’ credit risk. Using individual Eurozone listed banks’ information, we find that holding sovereign debt improves the level of banks’ credit risk, but this effect is reversed when the credit risk associated with such debt is taken into account. For this purpose, we consider three alternative sovereign debt holding proxies and two types of banks’ credit-risk measures, both forward- and backward-looking. We find that the transmission of credit risk from sovereign debt holdings to banks’ credit risk is only captured when forward-looking credit-risk measures, based on market data, are used.

Bootstrap-based probabilistic analysis of spillover scenarios in economic and financial networks

We apply techniques from the event probability forecasting literature to the analysis of spillover scenarios in economic and financial networks. A simple spillover scenario is expressed as an inequality constraint with respect to a single spillover measure. More complex spillover scenarios can be defined as combinations of simple scenarios. The scenario probabilities are evaluated using a non-parametric bootstrap. We use our technique to study credit risk transmission among a group of 18 countries over the 2006–2010 period. We show that abrupt changes in the probabilities of “crisis scenarios” accurately map on to key events during the Global Financial Crisis.

Complex network propagation effect based on SIRS model and research on the necessity of smart city credit system construction

In this paper, we first consider one of the interconnected enterprises in the economy as nodes in a complex network. Based on the SIRS risk contagion model, we describe the transmission process of credit risk between enterprises after the bursting of the stock market with the contagion process, and clarify their diffusion mechanism and effect. The propagation effect of SIRS model in complex network is simulated and analyzed. The results show that when the risk contagion intensity exceeds a certain threshold and the proportion of infected enterprises in the economy exceeds a certain level, it will inevitably lead to the insecurity of the whole economy. In most cases, the policy intervention of the regulatory authorities is necessary. If the crisis is allowed to infect, it is likely to induce the financial risk of the whole system; The construction of smart city credit system can use big data to solve the problem of information island, promote the co construction and sharing of data resources, assist the regulators to effectively prevent and block the transmission of credit risk, and nip the risk in the bud, so as to maintain social stability and economic security.

Tail event-based sovereign credit risk transmission network during COVID-19 pandemic

This paper investigates the interconnectedness between sovereign credit risk based on the tail event and network dynamics technique. Specifically, we examine the interdependence in upper tails of sovereign credit default swap in the case of fifteen most COVID-19 affected countries. Empirical findings indicate that connectedness among SCDS spreads changed over time and is higher during the COVID19 outbreak. Russia, Brazil, and China are the most credit risk emitter and receiver during the COVID-19 pandemic.

Banks’ international assets and sovereign default risk

PurposeThis paper aims to investigate the nexus between banks’ foreign assets and sovereign default risk in a panel of 15 developed economies. The empirical evidence suggests that banks’ foreign exposure is an important determinant of sovereign default probability.Design/methodology/approachUsing data from the consolidated banking statistics (total foreign claims on ultimate risk basis) by the Bank of International Settlements, the author constructs a measure of bank international exposure to peer countries. This measure is then used as the target variable in a panel regression for sovereign credit default swaps. The model includes 15 European and non-European developed economies. Identification is discussed extensively in the paper.FindingsQuantitatively, a 1% increase in banks’ cross-border claims increases sovereign default risk by about 0.19%. The relationship is weaker when banks are more capitalised. On the other hand, governments are more vulnerable to credit risk spillovers from banks’ international portfolios when having higher debt to GDP ratios.Originality/valueTo the best of the author’s knowledge, this is the first paper that attempts explicitly to establish an empirical connection between banks’ international assets and sovereign default risk. To the author’s opinion, this paper represents a contribution to our understanding of how sovereign credit risk spills over across countries. It also extends significantly the existing literature on the determinants of sovereign risk (that primarily focused on fundamentals, market characteristics – such as liquidity – and global factors). This paper ultimately sheds some new light on the role of intermediaries in the international transmission of credit risk, also adding to today’s discussion about the linkages between banks and sovereigns.

The mechanism of credit risk contagion among internet P2P lending platforms based on a SEIR model with time-lag

The credit risk contagion of Internet peer-to-peer (P2P) lending platforms is an important part of Internet financial risk management and supervision. This study analyzes the contagion path of credit risk in Internet P2P lending. Based on complex network theory and the theory of infectious disease dynamics, the characteristics of Internet P2P lending development are combined to construct a SEIR model of credit risk transmission among Internet P2P lending platforms with time lag, and the robustness of the model is analyzed and proven. The influence of platform correlations, the susceptible immune rate, the platform elimination rate, contagion latency, the saturation coefficient, and the susceptibility input rate on credit risk contagion behavior among Internet P2P lending platforms is analyzed, using the equilibrium point and threshold value. The impact of each variable is analyzed by simulation. Corresponding countermeasures and suggestions are proposed to prevent and control credit risk contagion among these platforms.

Cross-Autocorrelation, Risk Transmission and Contagion in the Global CDS Markets

We show that the cross-autocorrelation also exists in the global CDS markets and develop an econometric model to capture the global correlation structure. We study implications on the credit risk transmission and contagion risk. We find four main results: (i) credit risk transmission is through the cross-correlation at regional rather than sectoral level; (ii) time-variation in financial sector's importance is caused by asymmetric responses to the positive and negative macro news; (iii) autocorrelation reduces the contagion risk in Asia while has little impact on other regions; (iv) contagion risks in the US and EU originate from sectors with international influence.

The cross-country transmission of credit risk between sovereigns and firms in Asia

This paper uses Credit Default Swap (CDS) data for Asian reference entities to examine cross-country credit risk spillover effects between sovereigns and firms. Data for three East Asian countries (China, Japan and South Korea) over the period 2009–2018 are analysed. We analyse changes in the CDS spreads of a sovereign debtor and those of a foreign firm via a bivariate GARCH-full-BEKK model; thus, spillovers in mean spread changes as well as in volatility are considered. The main findings indicate that strong credit risk interdependence exists between the East Asian countries given that credit shocks from a common creditor such as Japan appear to spill over to the other two Asian nations. Compared to their non-financial counterparts, financial institutions are more sensitive than non-financial firms to changes in the credit risk of a foreign sovereign debtor; financial institutions such as banks may hold debt of foreign sovereigns which makes their CDSs sensitive to this source of credit risk.

It’s Not Time To Make a Change: Sovereign Fragility and the Corporate Credit Risk

Relying on a perspective borrowed from monetary policy announcements and introducing an econometric twist in the traditional event study analysis, we document the existence of an .event risk transfer., namely a significant credit risk transmission from the sovereign to the corporate sector after a sovereign rating downgrade. We find that after the delivery of the downgrade, corporate CDS spreads rise by 36% per annum and there is a widespread contagion across countries, in particular among those which were most exposed to the sovereign debt crisis. This effect exists on top of the standard relation between sovereign and corporate credit risk.

Structural Estimation of Time-Varying Spillovers: an Application to International Credit Risk Transmission

Nous proposons une nouvelle methodologie pour estimer les contagions financieres a l’aided’une version structurelle de l’approche de Diebold-Yilmaz. Le cœur de notre approche repose sur un modele SVAR-GARCH qui est identifie par heteroscedasticite et par la contribution maximale des chocs, et qui permet d’obtenir des decompositions non-constantes de la variance des erreurs de prevision. Nous analysons les contagions entre les CDS souverains et bancaires de la Zone Euro. En termes de methodologie, nous trouvons que notre modele permet de mieux identifier les chocs par rapport aux autres approches de la litterature, et qu’il est aussi plus reactif que les modeles estimes sur fenetres glissantes. Nous trouvons, en moyenne, que la contagion explique 37% de la variation des series de notre echantillon, avec toutefois de fortes variations dans le temps.

Analyzing credit risk transmission to the nonfinancial sector in Europe: A network approach

SummaryWe use a factor model and elastic net shrinkage to model a high‐dimensional network of European credit default swap (CDS) spreads. Our empirical approach allows us to assess thejointtransmission of bank and sovereign risk to the nonfinancial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and nonfinancial entities as well as sovereigns are grouped around the financial center. The network has a geographical component reflected in different patterns of real‐sector risk transmission across countries. Our framework also provides dynamic estimates of risk transmission, a useful tool for systemic risk monitoring.

Analyzing Credit Risk Transmission to the Non- Financial Sector in Europe: A Network Approach

Analyzing Credit Risk Transmission to the Non- Financial Sector in Europe: A Network Approach