The Determinants of Interbank Contagion: Do Patterns Matter?

Stefano Zedda (), Giuseppina Cannas () and Clara Galliani ()
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Stefano Zedda: European Commission, Joint Research Centre
Giuseppina Cannas: European Commission, Joint Research Centre
Clara Galliani: European Commission, Joint Research Centre

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2014, pp 303-313 from Springer

Abstract: Abstract The recent financial crisis highlighted that interconnectedness between banks has a crucial role, and can push the effects of bank defaults to extreme levels. Interconnectedness in banking systems can be modelled trough the interbank market structure. As only data on interbank credits and debts aggregated at bank level are publicly available, one common hypothesis is to assume that banks maximise the dispersion of their interbank credits and debts, so that the interbank matrix is approximated by its maximum entropy realisation. The aim of this paper is to test the influence of this approximation on simulations, and verifying if variations in the structure of the interbank matrix systematically change the magnitude of contagion. Numerical experiments on samples of banks from four European countries, showed that different interbank matrices produce small changes in the point estimation. Nevertheless, they significantly affect variability and confidence interval for the estimates, in particular in banking systems when contagion effects are more intense.

Keywords: Maximum Entropy; Total Asset; Banking System; European Central Bank; Capitalisation Level (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-319-02499-8_27

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DOI: 10.1007/978-3-319-02499-8_27

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