Bank diversity and financial contagion

Emmanuel Caiazzo and Alberto Zazzaro ()

Journal of Financial Stability, 2025, vol. 77, issue C

Abstract: This paper analyzes financial contagion in a banking system where banks are linked to each other by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic liquidity shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the complete interbank network, in which each bank borrows evenly from all the others, displays the usual robust-yet-fragile property. However, in the more general case of heterogeneous common asset holdings the complete interbank network is less resilient than other incomplete networks but not necessarily the most fragile. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.

Keywords: Banking crisis; Financial contagion; Interbank network; Asset commonality (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: BANK DIVERSITY AND FINANCIAL CONTAGION (2023)
Working Paper: Bank Diversity and Financial Contagion (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:77:y:2025:i:c:s157230892500021x

DOI: 10.1016/j.jfs.2025.101392

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