Interbank Contagion at Work: Evidence from a Natural Experiment

By Rajkamal Iyer, José-Luis Peydró. Social Science Research Network, 2011

276 citations recorded by the source corpus.

This paper tests financial contagion due to interbank linkages. For identification we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications. JEL Classification: G21, G28, E58

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/c00acec2ce57d40b01187cb4ca29a1a40dbf8cc9

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Failure and Rescue in an Interbank Network (2013, unknown): “Besides theoretical results on bank failure and contagion, there is also a wide range of empirical studies such as e.g. Iyer and Peydro (2011).”
Bank Risk-Taking, Securitization, Supervision and Low Interest Rates: Evidence from the Euro Area and the U.S. Lending Standards (2010, unknown): “Importantly, softer lending 29 Bank risk problems may transmit through the system through interbank contagion and other mechanisms (see Iyer and Peydró, 2010, and Bandt, et al., 2009).”
Taxes and Financial Constraints: Evidence from Linguistic Cues (2015, unknown): “Any liquidity shock from a local bank failure could propagate to other members through interbank borrowing networks (Iyer and Peydró (2011)).”
The real effects of the bank lending channel (2019, methodology): “Amiti and Weinstein (2011), Schnabl (2012), Iyer et al. (2014)), and we extend the KM framework to identity firm-level effects through credit supply.”
The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market (2012, background): “…Ashcraft (2006), and Ashcraft and Campello (2007)) or natural experiments (e.g., Peek and Rosengren (1997), Peek and Rosengren (2000a), Ashcraft (2005), Gan (2007), Khwaja and Mian (2008), Paravisini (2008), Chava and Purnanandam (2011), Iyer and Peydro (2011)) to control for omitted variables.”
Central clearing of OTC derivatives: Bilateral vs multilateral netting (2013, background): “Trading OTC derivatives through a CCP has some desirable effects: in a bilateral market default of one entity can spread throughout the system leading to a chain of contagious defaults (Cont et al., 2010; Iyer and Peydro, 2011).”
Financial Regulation, Financial Globalization and the Synchronization of Economic Activity (2009, unknown): “Using country-level data Imbs (2004) and Kalemli-Ozcan, Sørensen, and Yosha (2001) show that higher industrial specialization leads to less synchronized cycles. (9)Firms does not seem to be a↵ected from the reduction in credit supply in developed countries as shown by Rice and Strahan (2010) for U.S”