Interconnectedness and contagion in the Czech financial system

Adam Kučera and Milan Szabo

from Czech National Bank, Research and Statistics Department

Abstract: Interconnectedness in the financial system in the form of direct and indirect financial linkages is an aspect of systemic risk, primarily in its structural dimension. The financial linkages between economic agents enable shocks to transmit from one agent to another, causing contagion to spread gradually across the entire financial system. In the Czech financial system, domestic banks are the main source of direct interconnectedness as most of them are members of international financial groups and are simultaneously the counterparties for most domestic financial institutions. Indirect interconnectedness also plays a significant role in the Czech financial system, as domestic financial institutions hold identical or similar assets in their portfolios. Sectors of the real economy - especially the household sector, which is involved throughout the financial system - also naturally contribute to greater interconnectedness of the Czech financial system.

Date: 2021
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