Systemic risk contagion and bailout effects in the global financial system

This paper studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach—that examines simultaneously multiple channels of transmission and their important higher order effects—shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion.The structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, we find that the structure of the system and contagion remain similar in that network is highly susceptible to shocks from central countries and those with large financial systems (e.g., the USA and the UK). While, individual European countries (excluding the UK) have relatively low impact on shock propagation, the network is highly susceptible to the shocks from the entire euro area. Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.

Is there Inter-Regional Systemic Risk Contagion? An Investigation of Inter-Regional Systemic Risk Spillover Effects using the ESS-indicator and Bank CDS Spreads

Financial systemic risk is an important issue in economics and financial systems. Trying to detect and respond to systemic risk with growing amounts of data produced in financial markets and systems, a lot of researchers have increasingly employed machine learning methods. Machine learning methods study the mechanisms of outbreak and contagion of systemic risk in the financial network and improve the current regulation of the financial market and industry. In this paper, we survey existing researches and methodologies on assessment and measurement of financial systemic risk combined with machine learning technologies, including big data analysis, network analysis and sentiment analysis, etc. In addition, we identify future challenges, and suggest further research topics. The main purpose of this paper is to introduce current researches on financial systemic risk with machine learning methods and to propose directions for future work.

Climate policy uncertainty, clean energy and energy metals: A quantile time-frequency spillover study

The finance industry faces disruption when banks, as traditional incumbents, have to deal with growing competition from FinTech and BigTech companies. FinTech institutions are connected to traditional financial institutions like banks via various channels, constituting themselves as a part of the financial market and systemic risk with the possibility of spillover and risk contagion effects. The goal is to provide a literature review to detect theoretical perspectives, topics, and common issues in the connection between FinTech and systemic risk. A systematic approach to literature review was chosen, resulting in the analysis of 20 articles from the Web of Science database. Results confirm the positive connection between financial technology and systemic risk and call for future research.

In recent years, the importance of international capital flows has been increasing, which has significantly accelerated the integration process of the international financial system. After 2008, the central banks of major western developed economies implemented loose monetary policy, which led to a large amount of capital flowing into new market countries. However, international capital flowed out of new market countries after Federal Reserve Chairman Ben Bernanke said in 2013 that the Federal Reserve would gradually withdraw from quantitative easing.The great fluctuation of international capital has aroused the debate about monetary policy and macro-prudential policy. Rey (2015) believes that under any exchange rate system, only the control of international capital flows can maintain the independence of monetary policy. In view of the above findings, since 2016, the People’s Bank of China has established a macro-prudential regulatory mechanism for international capital flows to resist external financial shocks.By introducing domestic and international financial institutions, this paper brings the macro-prudential policy of foreign financial shocks and capital flows into the DSGE framework of small countries’ open economy. Domestic financial institutions can raise funds by absorbing the deposits of their own residents and foreign residents; international financial institutions buy and sell the creditor’s rights issued by various countries, so as to implement capital flows.It is found that under the impact of foreign interest rate increase, on the one hand, it will tighten the balance sheet of domestic financial institutions, and reduce the scale of corporate credit through bank incentives and constraints; on the other hand, it will cause the devaluation of domestic currency and international capital outflows, and affect the stability of the financial system. The macro-prudential management mechanism of capital flows can enhance the ability to resist external financial shocks. For China, the proportion of foreign debt is relatively low, and the policy effect is relatively mediocre for the counter cyclical tax adjustment mechanism of external borrowing of domestic financial structure; however, the counter cyclical adjustment mechanism for the capital flow of international financial institutions can significantly improve social welfare.This paper gives the following policy recommendations: Firstly, we should increase the significance of external financial risk prevention. In recent years, the rapid growth of international capital flows has brought new challenges to new economies. Secondly, we should strengthen the supervision of cross-border capital flows to resist external financial risks. In the process of further opening up of China’s financial market, the People’s Bank of China should improve the macro-prudential supervision of foreign exchange market, real estate market and credit market to prevent systemic financial risks. Finally, we should properly solve the financing problems of enterprises. For China, capital outflows will aggravate the already severe credit market pressure. Therefore, on the one hand, resist the external financial risk contagion through the macro-prudential supervision mechanism of capital flows; on the other hand, maintain the liquidity at a reasonable level through the flexible operation of monetary policy, in order to support economic growth.

The Future of the International Financial System: A CBDC Network and Regulatory Outlook

Analysis of the cross-region risk contagion effect in stock market based on volatility spillover networks: Evidence from China

This paper first analyzes the international financial systemic risk transmission mechanism in the big data environment, constructs an international financial systemic risk index system, and measures the index based on principal component analysis. Then, the existing international financial and macroeconomic literature is sorted out, a macroeconomic resilience index system is constructed, and the index is measured using the entropy value method. Finally, MS-VAR and TVP-VAR models are constructed based on the VAR model to analyze the non-linear effects of international financial systemic financial risks on macroeconomic impacts. The results show that a shock of 1 unit of CFSI causes a positive response of MR of about 0.23 in the long run, and CFSI all produce a negative shock to MI until this negative shock reaches a maximum of -0.023 in the 5th period.

Globalization in Practice: Does political participation change a financial centre’s competitiveness?

Estimating the Contagion Effect Through the Portfolio Channel Using a Network Approach

This research is devoted to the issues of reserve currency competition in the global financial system. The paperaimsto investigate key sources of competitive advantages of reserve currencies in the context of the development of the global financial system towards currency multipolarity and assess how digital transformation can affect the drivers of reserve currencies’ competitive positions in the global financial system. The author uses the followingmethodsof scientific research: analysis, synthesis, abstraction, deduction, induction, and logical method. The article notes that the financial market capacity is the key factor of reserve currency competitiveness. The author emphasizes that monetary policy instruments that provide funding for financial institutions play a key role in strengthening reserve currency competitiveness in the global financial market. The author highlights that during the COVID-19 crisis monetary policy of the central banks that issue reserve currencies stabilized the situation in the world financial system and strengthened the positions of the major reserve currencies in the global financial market. The author notes that the increase of monetary policy cooperation between central banks points to the evolution of the world financial system towards currency multipolarity. The research emphasized that the development of ecosystems driven by digital transformation can significantly affect the competitive positions of currencies in the global financial system. The authorconcludesthat the global financial system is evolving towards currency multipolarity meaning that the US dollar will remain a leading reserve currency and at the same time other reserve currencies will likely play a bigger role.Further researchof currency competition problems may investigate the impact of digital transformation on competitive positions of reserve currencies in the global financial system.

PurposeThe purpose of this paper is to determine whether countries are implementing enhanced customer due diligence (CDD) for financial transactions with the politically connected.Design/methodology/approachPublic information in relation to ratification of the UN anti‐corruption resolution, mutual evaluations of anti‐money laundering systems and Transparency International's (TI's) corruption reports are used to determine governments' attitudes to corruption and enhanced CDD recommended as best practice by the financial action task force (FATF).FindingsIt was found that low levels of compliance with recommended best practice when handling transactions with politically exposed persons, amongst the countries examined, are leaving the global financial network open to abuse by those in public office.Research limitations/implicationsThe release of mutual evaluation reports by the FATF and regional anti‐money laundering bodies has been of immense importance in determining the level of compliance with FATF recommendations. However, until a similar exercise is conducted on a global scale the true situation facing the global financial network cannot be determined.Practical implicationsThe lack of scrutiny of financial transactions of the politically connected puts the global financial system at risk and allows corruption at the highest levels to flourish.Originality/valuePublication of the mutual evaluations of both FATF members and non‐member countries provides an opportunity, not previously available, to analyse the compliance with FATF recommendations across counties around the world. Given the TI findings, levels of corruption increasing and the involvement of public officials at the highest level, it is important to understand how transactions with the politically connected are being handled.

This study uses daily data across 24 sectors in China to investigate the contagion effect of systemic risk among industries. The data include industry returns, sentiment and marginal expected shortfalls (MES) from 1 January 2016 to 31 December 2022. A multi-source heterogeneous (MSH) data fusion method and an empirical Bayesian approach are employed to construct MSH data and build a complex network based on a graphical Gaussian model. The findings confirm high positive correlations and a significant clustering effect among industries in the Chinese stock market due to upstream and downstream supply chains and shareholding relationships. Moreover, the study reveals that systemic risk contagion is significantly associated with extreme events and the dissemination of investor sentiment. We calculate industry’s systemic risk receiver (SSR) index, rank the industries based on their SSR index values and select the 10 highest ranked as systemically important industries. This study offers valuable insights for regulators and policymakers seeking to bolster macro-prudential oversight and implement targeted supervision initiatives.

In recent years, "black swan" events have increasingly occurred across climate, epidemics, geopolitics, and economics, leading to a gradual coupling of different types of risk. Different from isolated shocks as a single type of risk affecting a specific industry, a nexus of risks allows one risk area to quickly relate to others, resulting in more catastrophic impacts. Utilizing an integrated framework, we investigate the contagion effects among climate policy uncertainty, the infectious disease equity market volatility tracker, geopolitical risk, and economic policy uncertainty using volatility, skewness, and kurtosis as risk measures. The results indicate that: (1) The contagion effect of different types of risk increases with higher order risk measures, suggesting that more extreme events are more likely to be contagious across domains. (2) Approximately two-thirds of risk contagion occurs contemporaneously, while about one-third occurs with a lag, indicating that risk contagion combines both immediacy and continuity. (3) Risk contagion exhibits significant time-varying and heterogeneous characteristics. Our study elucidates the inherent contagion characteristics between different types of risk, transforming the understanding of risk from a one-dimensional to a multidimensional perspective. This underscores that risk management should not be confined to a single domain; it is crucial to consider the potential impacts of risks from other industries on one's own.