Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2019:4: Systemic Risk and Centrality Revisited: The Role of Interactions

Hossein Asgharian (), Dominika Krygier () and Anders Vilhelmsson ()
Additional contact information
Hossein Asgharian: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Dominika Krygier: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Anders Vilhelmsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We suggest that banks contribute extensively to systemic risk only if they are both "risky" and centrally placed in the financial network. To calculate systemic risk we apply the CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank's contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for "risky" banks and overestimates the effect for "safer" banks.

Keywords: systemic risk; network centrality; loan syndication; CoVaR

JEL-codes: G18; G21

38 pages, March 5, 2019

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