The topology of cross-border exposures: beyond the minimal spanning tree approach

TL;DR

This paper analyzes the structure and evolution of cross-border financial networks using topological methods, revealing significant structural changes since 1997 and the impact of financial crises on these networks.

Contribution

It introduces a novel topological approach and residuality coefficient to study the structural evolution of international financial linkages over time.

Findings

Network structures changed significantly after 1997

Residuality coefficient captures structural evolution

Financial crises are linked to network reconfigurations

Abstract

The recent financial crisis has stressed the need to understand financial systems as networks of interdependent countries, where cross-border financial linkages play the fundamental role. It has also been emphasized that the relevance of these networks relies on the representation of changes follow-on the occurrence of stress events. Adopting a topological approach we are able to address the role that network structures play in the spread of shocks and conversely, the effectiveness of stress events and its impact on the structure of the networks. Here, from series of interbank liabilities and claims over different time periods, we have developed networks of positions (net claims) between countries. Besides the Minimal Spanning Tree analysis of the time-constrained networks, a coefficient of residuality is defined to capture the structural evolution of the network of cross-border financial linkages. Because some structural changes seem to be related to the role that countries play in the financial context, networks of debtor and creditor countries are also developed. Empirical results allows to relate the network structure that emerges in the last years to the globally turbulent period that has characterized financial systems since the latest nineties. The residuality coefficient highlights an important modification acting in the financial linkages across countries in the period 1997-2011, and situates the recent financial crises as replica of a larger structural change going on since 1997.