Banking Networks and Leverage Dependence: Evidence from Selected Emerging Countries

TL;DR

This study analyzes banking networks in five emerging countries by constructing leverage-based financial networks, revealing modular structures, synchronized dynamics, and the impact of growth on interconnectivity, supported by a proposed model.

Contribution

It introduces a novel network construction based on leverage dependence and demonstrates its structural properties across multiple emerging markets.

Findings

Banks show diverse leverage behaviors.

Networks form large interconnected clusters.

Faster-growing banks tend to be more interconnected.

Abstract

We use bank-level balance sheet data from 2005 to 2010 to study interactions within the banking system of five emerging countries: Argentina, Brazil, Mexico, South Africa, and Taiwan. For each country we construct a financial network based on the leverage ratio dependence between each pair of banks, and find results that are comparable across countries. Banks present a variety of leverage ratio behaviors. This leverage diversity produces financial networks that exhibit a modular structure characterized by one large bank community, some small ones and isolated banks. There exist compact structures that have synchronized dynamics. Many groups of banks merge together creating a financial network topology that converges to a unique big cluster at a relatively low leverage dependence level. Finally, we propose a model that includes corporate and interbank loans for studying the banking system. This model generates networks similar to the empirical ones. Moreover, we find that faster-growing banks tend to be more highly interconnected between them, and this is also observed in empirical data.