How interbank lending amplifies overlapping portfolio contagion: A case study of the Austrian banking network

Fabio Caccioli, J. Farmer, Nick Foti and Daniel Rockmore

Papers from arXiv.org

Abstract: In spite of the growing theoretical literature on cascades of failures in interbank lending networks, empirical results seem to suggest that networks of direct exposures are not the major channel of financial contagion. In this paper we show that networks of interbank exposures can however significantly amplify contagion due to overlapping portfolios. To illustrate this point, we consider the case of the Austrian interbank network and perform stress tests on it according to different protocols. We consider in particular contagion due to (i) counterparty loss; (ii) roll-over risk; and (iii) overlapping portfolios. We find that the average number of bankruptcies caused by counterparty loss and roll-over risk is fairly small if these contagion mechanisms are considered in isolation. Once portfolio overlaps are also accounted for, however, we observe that the network of direct interbank exposures significantly contributes to systemic risk.

Date: 2013-06
New Economics Papers: this item is included in nep-ban and nep-net
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Citations: View citations in EconPapers (17)

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