Non-Performing Loans and Systemic Risk in Financial Networks

In this paper we study the impact of non-performing loans (NPLs) on financial stability using a network based approach. We start by combining loan-level data from DealScan and firm-level data from Orbis to reconstruct the global financial network in 1991-2016 and identify a series of stylized facts. We show that many regularities found at national level by the literature hold also at international level. Based on our empirical findings, we develop a simple network model in which banks and firms are linked by their reciprocal claims and study how an exogenous increase in NPLs affects the stability of the system. We investigate the model using Monte Carlo simulations and show that there exists a critical threshold of NPLs beyond which a systemic crisis occurs. This implies that small variations in the magnitude of the initial shock can have very different consequences at the aggregate level