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This paper mines the experience of the nineteenth‐century capital markets to propose an alternative interpretation of international defaults. The standard view—that sovereign default entails exclusion from markets—was often contradicted by reality: in some cases lending ceased, but in others it continued. This paper claims that lenders' responses to default stem from the additional knowledge about borrowers that is acquired during default episodes. Lending is modelled in a costly‐state‐verification environment where sovereigns have private information about their investment projects (good or bad). After default, lenders audit projects and interrupt lending only if the project is believed to be a 'bad' one.

PurposeThe purpose of this paper is to show how network analysis can be used for effective cross‐border financial surveillance, which requires the monitoring of direct and indirect systemic linkages.Design/methodology/approachThis paper illustrates how network analysis could make a significant contribution in this regard by simulating different credit and funding shocks to the banking systems of a number of selected countries. After that, the authors show that the inclusion of risk transfers could modify the risk profile of entire financial systems, and thus an enriched simulation algorithm able to account for risk transfers is proposed.FindingsFinally, the authors discuss how some of the limitations of the simulations are a reflection of existing information and data gaps, and thus view these shortcomings as a call to improve the collection and analysis of data on cross‐border financial exposures.Originality/valueThis paper is one of the very few to take a cross‐border perspective on financial networks. It is also unique in accounting for risk transfers and in proposing a methodology to include the analysis (and monitoring) of risk transfers into a network model.