Finding Systemically Important Financial Institutions around the Global Credit Crisis: Evidence from Credit Default Swaps

With an international dataset of credit default spreads as a credit risk measure, we propose a novel empirical framework to identify the structure of credit risk network across major financial institutions around the recent 2007-2008 global credit crisis. The findings directly shed light on credit risk transmission in a financial network and help find systemically important financial institutions from the perspective of interconnectedness. Specifically, Lehman Brothers, Morgan Stanley, Sefeco, Chubb, and possibly AIG in the US and BNP Paribs, Dresdner bank, and UBS in the Europe are primary senders of credit risk information. Goldman Sachs, Bear Sterns, Bank of America, and Metlife in the US and Barclays, RBS, Commerzbank, and HVB in the Europe play the role of the exchange center on the credit market by intensively receiving from some financial institutions and then transferring credit risk information to others. Finally, Citigroup, Wachovia, JPMorgan and Hartford in the US, and ABN AMRO, ING, Rabobank, and Deutsche Bank in the Europe appear to be prime receivers of credit risk information. Further analysis shows that leverage ratios and certain aspect of corporate governance (i.e., CEO duality) may be significant determinants of identified different roles of financial institutions in credit risk transfer, while no such evidence is found for other factors including size, liquidity and asset write-downs.