The decline of solvency contagion risk

Marco Bardoscia, Paolo Barucca (), Adam Brinley Codd () and John Hill
Additional contact information
Paolo Barucca: University of Zurich, London Institute for Mathematical Science, IMT Lucca
Adam Brinley Codd: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 662, Bank of England working papers from Bank of England

Abstract: We study solvency contagion risk in the UK banking system from 2008 to 2015. We develop a model that not only accounts for losses transmitted after banks default, but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change. We apply our model to a unique data set of real UK interbank exposures. We show that risks due to solvency contagion decrease markedly from the peak of the crisis to the present, to the point of becoming negligible. By decomposing the change in losses into two main contributions — the increase in banks’ capital and the decrease in interbank exposures — we are able to pinpoint the main driver in each year. In some cases we observe that an increase in aggregate capital is associated with a positive contribution to losses. This suggests that the distribution of capital among banks is also important.

Keywords: Financial networks; systemic risk; financial contagion; macroprudential policy; stress testing (search for similar items in EconPapers)
JEL-codes: D85 G01 G12 G21 G28 G33 G38 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-06-30
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... 1848928493588AD2E984 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0662

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().