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Credit risk interconnectedness: What does the market really know?

Puriya Abbassi, Christian Brownlees, Christina Hans and Natalia Podlich

Journal of Financial Stability, 2017, vol. 29, issue C, 1-12

Abstract: We analyze the relation between market-based credit risk interconnectedness among banks during the crisis and the associated balance sheet linkages via funding and securities holdings. For identification, we use a proprietary dataset that has the funding positions of banks at the bank-to-bank level for 2006–2013 in conjunction with investments of banks at the security level and the credit register from Germany. We find asymmetries both cross-sectionally and over time: when banks face difficulties to raise funding, the interbank lending affects market-based bank interconnectedness. Moreover, banks with investments in securities related to troubled classes have a higher credit risk interconnectedness. Overall, our results suggest that market-based measures of interdependence can serve well as risk monitoring tools in the absence of disaggregated high-frequency bank fundamental data.

Keywords: Credit risk; Networks; CDS; Interbank lending; Portfolio distance (search for similar items in EconPapers)
JEL-codes: C33 C53 E44 F36 G12 G14 G18 G21 (search for similar items in EconPapers)
Date: 2017
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