Risk Sharing and Amplification in the Global Financial Network

We develop a structural model of the global financial network and analyze its evolving role in facilitating risk sharing and propagating shocks across countries and sectors. The model introduces a two-layer network structure, incorporating both the global interbank and bank-firm credit networks, and jointly accounts for bank capital flows and lending prices. Using balance sheet data from 19 countries, we estimate the price elasticities of cross-border loan supply and demand, which reveal significant heterogeneity in the willingness and capacity of global banks to provide intermediary services. We show that this heterogeneity is key to explaining the variation in risk sharing and shock propagation both across countries and over time. In particular, cross-border lending supply has become less elastic since the global financial crisis (GFC), resulting in a weakening of international risk sharing. We provide suggestive evidence that the tightening of macroprudential policy has contributed to the decline in risk sharing