Systemic risk contagion and bailout effects in the global financial system

This paper contributes to the finance literature by investigating the risk contagion and bailout effects in the global financial system. We use the bilateral exposure matrix to examine the impact of credit shocks and liquidity shocks on the global financial system when a Global Systemically Important Bank (G-SIB) is supposed to be in distress. The findings indicate that the global financial network is dominated by large and medium-sized financial institutions. Credit shocks does not play a significant role in risk contagion nor do they trigger the systemic risk in the global financial system. However, the global financial network is more vulnerable to liquidity shocks than to credit shocks. If a credit shock and liquidity shock overlaps with each other, the hybrid shock can exacerbate the risk contagion effects and lead to rapid propagation throughout the global financial network. If a regulator bails out the distressed institutions, the bailout efficiency increases with the number of rescued institutions. However, the improvement in of bailout efficiency decreases with the number of rescued institutions. If a regulator can promote financial institutions to raise the rollover ratio, the financial system will be more robust to shocks. This paper provides a ground view of systemic risks contagion and sheds light on directions for future research on systemic risk contagion in the global financial system. • The credit shock does not play a significant role in risk contagion in the global financial system. However, the liquidity shock has shown more substantial effects than that of the credit shock. • If the credit shock and liquidity shock overlaps with each other, the contagion effects are amplified. • If the regulator implements the bailout, the total rescue effects in the second round is better than that of other rounds. • If the financial institutions can raise the rollover ratio, the impact of systemic risk could be reduced significantly.