Title: Fragility and contagion within European Union's banking system: the network prospective

Authors: Muhammad Mohsin Hakeem; Ken-ichi Suzuki

Addresses: Graduate School of Economics and Management, Tohoku University, Sendai, Japan ' Graduate School of Economics and Management, Tohoku University, Sendai, Japan

Abstract: The 2007 to 2009 financial crises also known as 'global financial crisis' has shown the importance of contagion and interconnectedness among financial nodes. This trickles down the crisis effect to small nodes and whole system becomes fragile. We analysed selected EU members banking system network in terms of their pre- and post-crisis status. By using the matrix of bilateral obligations and their capital levels, conducted stress test simulations for both periods. Different levels of shocks entail most aspects of stress tests in terms of identifying networks strength and interconnectedness. Short-terms to long-term clearing scenarios are used to identify strong and weak nodes within system during both time frames. Default probabilities for different levels of shocks shows realistic picture of the banking systems, as they received huge bailouts and financing from governments and regulators. Default probabilities are used to identify the level of difficulty faced by particular institution or whole system.

Keywords: banking networks; bilateral exposure; contagion; credit shock; economic policy; European Union; EU banking systems; global financial crisis; interconnectedness; capital levels; stress tests; simulation; default probability; bank defaults.

DOI: 10.1504/IJMEF.2016.076477

International Journal of Monetary Economics and Finance, 2016 Vol.9 No.2, pp.115 - 131

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 10 May 2016 *

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