Cross-Border Interbank Contagion in the European Banking Sector

49 Pages Posted: 31 Mar 2015

See all articles by Silvia Gabrieli

Silvia Gabrieli

Banque de France

Dilyara Salakhova

Banque de France

Guillaume Vuillemey

HEC Paris - Finance Department

Date Written: March 2015

Abstract

This paper studies the scope for cross-border contagion in the European banking sector using true bilateral exposure data. Using a model of sequential solvency and liquidity cascades in networks, we analyze geographical patterns of loss propagation from 2008 to 2012. We study the distribution of contagion outcomes after a common shock and an exogenous bank default over simulated networks of actual long- and short-term claims. We exploit a novel and unique dataset of money market transactions estimated from TARGET2 payments data. Our results show the critical impact of the underlying network structure on the propagation of losses. An econometric analysis of the determinants of contagion shows that the position of a bank in the network and its exposure to the riskiest counterparties are significantly correlated with default outcomes, behind its own financial ratios.

Keywords: Contagion, Interbank market, Stress Testing, Liquidity Hoarding, Counterparty Risk

JEL Classification: G01, G21, G28, F36

Suggested Citation

Gabrieli, Silvia and Salakhova, Dilyara and Vuillemey, Guillaume, Cross-Border Interbank Contagion in the European Banking Sector (March 2015). Banque de France Working Paper No. 545, Available at SSRN: https://ssrn.com/abstract=2587635 or http://dx.doi.org/10.2139/ssrn.2587635

Silvia Gabrieli (Contact Author)

Banque de France ( email )

32 rue Croix des Petits Champs
Paris, 75001
France

Dilyara Salakhova

Banque de France ( email )

Paris
France

Guillaume Vuillemey

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

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