Transmission channels of systemic risk and contagion in the European financial network

By Nikos Paltalidis, Dimitrios Gounopoulos, Renatas Kizys, Yiannis Koutelidakis. 2015

154 citations recorded by the source corpus.

We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/08ec2ab3ee0f4fb3216cb18fd1e22e55671b85cc

Citations in the corpus

• Systemic Risk and Bank Size (2018, unknown): “Paltalidis et al. (2015) use networks to model contagion at the country level and find that sovereign risk is the most important channel that amplifies systemic risk in the Euro area.”