Transmission channels of systemic risk and contagion in the European financial network

Nikos Paltalidis, Dimitrios Gounopoulos, Renatas Kizys and Yiannis Koutelidakis

Journal of Banking & Finance, 2015, vol. 61, issue S1, S36-S52

Abstract: We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.

Keywords: Systemic Risk; Maximum Entropy; Interbank market; Financial network; Sovereign credit risk; European banks (search for similar items in EconPapers)
JEL-codes: D85 F37 G01 G21 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:61:y:2015:i:s1:p:s36-s52

DOI: 10.1016/j.jbankfin.2015.03.021

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