Financial Networks, Bank Efficiency and Risk-Taking

Thiago Silva (), Solange Guerra, Benjamin Tabak and Rodrigo Miranda

No 428, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Networks with a core-periphery topology are found in many financial systems across different jurisdictions. Though the theoretical and structural aspects of core-periphery networks are clear, the consequences that core-periphery structures bring for banking efficiency stand as an open question. We address this gap in the literature by providing insights as to how the structure of financial networks can affect bank efficiency. We find that core-periphery structures are cost efficient for banks, which is a characteristic that encourages the participation of banks in financial networks. On the downside, we also show that core-periphery structures are risk-taking inefficient, because they imply higher systemic risk levels in the financial system. In this way, regulators should be aware of the excessive risk inefficiency that arises in the financial system due to individual decisions made by banks in the network.

Date: 2016-04
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (39)

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Journal Article: Financial networks, bank efficiency and risk-taking (2016)
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