An evolution of global and regional banking networks: A focus on Japanese banks' international expansion

The significant increase in cross-border lending of Japanese banks since the Great Financial Crisis of 2007-2009 is documented to have both a global and regional dimension. This paper investigates how this expansion affects domestic financial stability. Based, on a network-based approach we show that Japanese banks have a prominent role in the global banking network in providing liquidity via cross-border lending. We also apply the Spinglass methodology to detect communities formed within the network and show that Japan is highly connected and has a central role in the East-Asian regional banking network. As a further step in the analysis, we employ a novel spatial econometric approach, namely, a time-varying spatial autoregressive (SAR) model to analyze the evolution of the network's spillover effects over time. Our empirical analysis points to the positive spillover effects of banking stability arising from cross-border lending activities. However, the results suggest that the spillovers are more pronounced at the global level than regional. Furthermore, we find that the role of Japanese banks in the global banking network has more than doubled since 2014.

Automated summary

This paper examines the impact of the significant increase in cross-border lending of Japanese banks since the Great Financial Crisis on domestic financial stability. The study finds that Japanese banks play a vital role in the global banking network by providing liquidity through cross-border lending. Additionally, Japan has a central position in the East-Asian regional banking network. The analysis also reveals positive spillover effects of banking stability arising from cross-border lending activities, with stronger effects at the global level than the regional level. Moreover, the study shows that the role of Japanese banks in the global banking network has more than doubled since 2014.