Systemic risk in the consumer credit network across financial institutions

Abstract

This study investigated a network of financial institutions in Korea using the Korea Consumer Credit Panel (KCCP). It is assumed that each consumer borrows from multiple institutions, so those institutions share risks from the same consumers regardless of the quality or type of loan. We constructed a financial network comprising those institutions and computed a contagion index based on their interconnections using a weight of probability of default for the individual borrowers. We found strong connection between banking institutions and credit card firms because of the convenience of making small loans using credit cards. However, with a weighted probability of default to the linkages among institutions, the connections between banking institutions and savings banks, non-credit card finance corporations and merchant banks are stronger than others, while banking institutions hold a central position and are exposed to the largest amount of loans individually. The contagion index hit a peak in 2013Q1 and then fell rapidly, before fluctuating at a relatively low level from 2016 to 2017Q2. The results enabled authorities to monitor systemic risk from the level of consumer credit, while accounting for specific types of consumers and their probability of default. This paper’s main contribution is its construction of a network of financial institutions from the level of consumer credit.