Essays on Solvency and Liquidity Using Financial Networks

This thesis sheds light on solvency and liquidity issues using financial networks in both a domestic economy and an international financial market. Chapters 2 and 3 of the thesis focus on analyzing systemic risk in cross-border banking system using the network-based eigen-pair method that treats network failure as a dynamical system stability problem. The quarterly balance sheet data is used to construct the so-called stability network of the Core Global Banking System (CGBS) for 19 BIS countries in the span of 2005 to 2020. Our findings confirm the ability of the method in providing early warning signals for the 2008 Global Financial Crisis (GFC) and highlight the instability of the banking system network for the post-GFC throughout the sample period and finally, call for the necessity of remedial actions. The thesis also identifies systemically important and vulnerable banking systems using network centrality metrics to address the contribution of each banking system to the network and show the threatening role of the US, UK, and Spanish banking systems and the possible consequences of their failure in the international banking system. While the second and third chapters focus on the global banking system, Chapter 4 investigates liquidity dynamics in the domestic US economy, highlighting the importance of comprehending liquidity for financial stability. The research utilizes the Structural Vector Autoregression (SVAR) model to analyze causal relationships and capture complex liquidity dynamics in the US economy. The study emphasizes the significance of disruptions in debt payments by firms and the role of the money market in financing current liabilities. The findings show the crucial role of the quick ratio and network effect in the economy’s business cycle compared to other variables. Policymakers, regulators, and market participants can utilize these insights to manage liquidity risks effectively and establish resilient frameworks to promote market stability.