How stressed are the banks? An inter-temporal network analysis

Abstract

This study employs a network model to examine the dynamics of stress in the Indian banking system. The study designs comprehensive Stress Network Structures under different phases of the economic cycle by integrating stress scores of constituent banks with a measure of return connectedness among them. Important metrics of the Stress Network Structures are combined to construct respective Stress Network Indices (SNIs). Besides identifying significant determinants of SNIs, the analysis identified major stress-emitting institutions. Our results underscore the potential of rapid stress transmission and greater destabilizing impact in a tightly interconnected Stress Network, characterized by a high average clustering coefficient and lower average path length. The paper also measures the magnitude of stress spillover, emphasizing its positive association with the degree of interconnectedness among banks during economic upturns and downturns. From a policy perspective, the study recommends a greater regulatory focus on Systemically Important Banks (SIBs) that serve as the epicenters of stress propagation.