Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion?

By Christian Upper, Andreas Worms. Social Science Research Network, 2002

866 citations recorded by the source corpus.

Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate the matrix of bilateral credit relationships for the German banking system and test whether the breakdownof a single bank can lead to contagion. We find that the financial safety net (institutional guarantees for saving banks and cooperative banks) considerably reduces - but does not eliminate - the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15% of the banking system in terms of assets.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/83a98737518dd443cb480aceb8055dbd1401eab7

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Citations in the corpus

Transmission channels of systemic risk and contagion in the European financial network (2015, neutral): “Then if 𝑓(𝒂 𝒊 ) and 𝑓(𝒍 𝒋 ) are independent it follows that 𝑥 𝑖𝑗 = 𝒂 𝒊 𝒍 𝒋 (see also Upper and Worms 2004 for further reading).”
RESILIENCE TO CONTAGION IN FINANCIAL NETWORKS (2011, neutral): “In the finance literature, in the context of banking systems, contagion effects and network externalities have been investigated in both in theoretical [1, 10, 19, 22, 45] and empirical studies [17, 20, 49, 44].”
Where the Risks Lie: A Survey on Systemic Risk (2017, neutral): “As pointed out by Wagner (2010), there is a trade-off between ensuring that all banks have the same prudent behavior, and encouraging heterogeneity in risk-taking.”
Contagion in financial networks (2010, result): “By contrast, Upper and Worms (2004) and Van Lelyveld and Liedorp (2006) suggest that contagion risk may be somewhat higher in Germany and the Netherlands.”
Quantification of systemic risk from overlapping portfolios in the financial system (2018, background): “…research on financial networks has mainly focused on default contagion: mostly, on direct lending networks between financial institutions (Upper and Worms, 2002; Boss et al., 2004, 2005; Soramäki et al., 2007; Iori et al., 2008, 2015; Cajueiro et al., 2009; Bech and Atalay, 2010; Fricke…”
Simulation methods to assess the danger of contagion in interbank markets (2011, background): “Upper and Worms (2004), Elsinger et al. (2006a) and Degryse and Nguyen (2007) performed robustness checks using net instead of gross exposures and found conflicting evidence on the extent to which netting reduces the possibility for contagion.”