Credit Rating Migration Risk and Interconnectedness in a Corporate Lending Network

This study assesses the credit rating migration risk and interconnectedness among bank-to-listed firms and insurer-to-listed firms in Japan's corporate lending market during the fiscal years 2008-2015. The study uses outstanding lending data with borrowers and lenders names to conduct a portfolio credit risk analysis. The results show an expected shortfall with tail dependence of t-copula captures the heavy-tailed risk of Japanese institutions. The study also analyzes the network structure of lending contracts using network centrality measures. In this regard, institutions play a central role in terms of degree centrality. The study then undertakes a stress test using a historical economic scenario pertaining to a credit rating migration matrix shortly after the Lehman Brothers' bankruptcy. The test finds a much sparser network structure because of a large number of firm defaults. The study's analysis offers banks and insurers important implications regarding the credit risk management of corporate lending