IMF Paper Examines Interconnectedness of Global Financial System
IMF published a working paper that studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion.
The paper provides a brief overview of the literature on financial shock contagions and shock transmissions in multilayer networks. It discusses a few structural measures for aggregated and multilayer networks that may influence the contagion process. It also describes the spreading process that used to model the financial contagion. It then shows simulation results for shocks that originate in the UK, the United States, euro area, China, and Hong Kong SAR, using the visualization of network maps and shocks-propagation curves.
The results show that structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, the structure of the system and contagion remain similar, in that network is highly susceptible to shocks from central countries and those with large financial systems (for example, the United States and the UK). Although individual European countries (excluding the UK) have relatively low impact on shock propagation, the network is highly susceptible to the shocks from the entire euro area. Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.
Related Link: Working Paper
Keywords: International, Banking, Research, Financial Stability, Global Interconnectedness, IMF
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