DOI: 10.5176/2251-1997_AF18.216

Authors: Frankie Chau, Chulwoo Han, Shimeng Shi

Abstract:

This paper investigates dynamics and determination of credit risk transmission across the global systemically important financial institutions (G-SIFIs) during the period 2006-2014. Our main findings are as follows. First, using the connectedness measures proposed by Diebold and Yilmaz (2015a), we find that there are important episodes and fluctuations in the spillover of default risks across these large and internationally active financial companies. Specifically, we document a significant increase in the total credit risk transmission among G-SIFIs during the period of severe financial events and as the financial crises intensified, so too did the cross-border spillover of default risk; with significant threat carrying over from the largest U.S. banks and insurers to the other international G-SIFIs in the EU and the Asia. Second, while there are bilateral linkages between the global systemically important banks (G-SIBs) and the global systemically important insurers (G-SIIs), our results show that the threat to global financial stability that a large bank would pose if it were to fail is generally greater than that of an insurer. Third, we find that the fluctuations in interbank lending, unconventional trading activity, regulatory leverage ratios, and the additional loss absorbency requirements can have significant impact on a G-SIB’s contribution to credit risk spillovers. In general, these results are robust to model specifications and should provide a useful reference for central bankers and regulators in monitoring and addressing the risks posed by global systemically important financial institutions as well as on their interactions with other major financial institutions across the world.

Keywords: banking sector, number of branches, profitability, branch increase, branch decrease.

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