Systemic risk between banks and firms in dual-layer dynamic networks

Abstract

In this paper, we utilize the interbank market, inter-firm transaction linkages, and inter-bank lending connections to construct a dual-layered network that interconnects banks and firms. Subsequently, we develop a theoretical model of systemic risk by integrating system dynamics, aiming to explore the patterns of systemic risk between banks and firms. Furthermore, we employ the LASSO-ΔCoVaR method to construct indicators of network topology and systemic risk, and empirically analyze the characteristics of time-varying tail risk spillovers between banks and firms in China from 2013 to 2022. The theoretical study reveals a steady state of default risk within the dual-layered risk contagion network. When banks and firms form a quasi-regular dual-layered network structure, an analytical solution for the expected loss of the dual-layered network can be derived. The empirical results indicate: (1) A strong correlation and linkage between tail risk spillovers of banks and firms. (2) Significant asymmetry in risk spillover between banks and firms. (3) Higher levels of systemic risk exposure and contribution for firms compared to banks. This paper offers theoretical support for identifying risks between banks and firms and provides methods for preventing systemic risks.