Looking for grass-root sources of systemic risk: the case of "cheques-as-collateral" network

TL;DR

This paper introduces a micro-level network analysis of 'cheques-as-collateral' to assess systemic risk within a bank's lending network, offering insights for regulators beyond traditional models.

Contribution

It presents a novel methodology for analyzing intra-bank financial interconnections using real case data, enhancing systemic risk assessment tools.

Findings

Identifies negative spillovers from disruptions in the cheques-as-collateral network.

Provides a model that complements existing credit scoring by including systemic risk factors.

Demonstrates applicability to various segments of the financial system.

Abstract

The global financial system has become highly connected and complex. Has been proven in practice that existing models, measures and reports of financial risk fail to capture some important systemic dimensions. Only lately, advisory boards have been established in high level and regulations are directly targeted to systemic risk. In the same direction, a growing number of researchers employ network analysis to model systemic risk in financial networks. Current approaches are concentrated on interbank payment network flows in national and international level. This work builds on existing approaches to account for systemic risk assessment in micro level. Particularly, we introduce the analysis of intra-bank financial risk interconnections, by examining the real case of "cheques-as-collateral" network for a major Greek bank. Our model offers useful information about the negative spillovers of disruption to a financial entity in a bank's lending network and could complement existing credit scoring models that account only for idiosyncratic customer's financial profile. Most importantly, the proposed methodology can be employed in many segments of the entire financial system, providing a useful tool in the hands of regulatory authorities in assessing more accurate estimates of systemic risk.