Credit–debt relationships among economic agents comprise large-scale networks of the economic system on national and global scales. There are different layers in such networks even at the core of real economic and financial systems. One layer is the arena of the real economy, namely supplier–customer links among firms as nodes. Firm activities are financed by financial institutions as well as directly by financial markets. The layer of the supplier–customer network is thus linked to another layer of financial networks between firms and banks. Furthermore, banks are also creditors and debtors of themselves comprising another layer of inter-bank networks.

As a financial system, the inter-bank network resides at the core, which is connected with firms, via bank–firm networks, at the periphery of the system; the periphery is a large network of suppliers and customers comrising the engine of the real economy. These networks are actually further linked to financial markets, but one may depict the basic picture as in Fig. 9.1.

Systemic risk is a network effect caused by failures or financial deterioration of debtors and creditors through the credit–debt links to other nodes even in a remote part of the network. Systemic risk often has considerable consequences at a nation-wide scale, and sometimes at a world-wide extent, as one experiences today in repeated financial crises.

While an understanding of the inter-bank network at the core of the financial system is crucial, no less important is the propagation of risk from the core of banks to the periphery of firms, or vice versa, as well as the propagation of risk among firms. Unfortunately, empirical studies based on the real data of bank–firm networks or supplier–customer networks on a large scale is still lacking.

In this chapter, we shall study how one can quantify the systemic risk by using real data on a nation-wide scale for inter-firm production networks and firm–bank credit networks.

Nation-wide Production Network

Supplier–customer relationships among firms in the production network are the arenas where financial distress spreads from distressed debtors of customers to its creditors of suppliers. While the events of bankruptcies can be easily observed, the underlying contagion effect of financial distress can have considerable consequences such as a chain of bankruptcies.