Abstract

Joint with U. Kochanska, C. Kok

This paper uses network formation techniques based on the theoretical framework of Halaj and Kok (2014) to construct networks of lending relationships between a large sample of banks and non-financial corporations in the EU. Networks of bank-firm lending relationships provide an alternative approach to studying real-financial linkages, which takes into account the heterogeneous characteristics of individual banks and firms on the propagation of shocks between the financial sector and the real economy. One particular strength of the model is related to the fact that the proposed framework provides an assessment not only of how banks are directly related to each other in the interbank market but also how they may be indirectly related (due to common exposures) via their corporate lending relationships. The model can be used to conduct counter-factual simulations of the contagion effects arising when individual or groups of banks and firms are hit by shocks. This could allow policy makers to gauge specific vulnerabilities in the financial system evolving around the lending relationships between banks and their (corporate) borrowers.