Interbank contagion at work: evidence from a natural experiment

Rajkamal Iyer and Jose-Luis Peydro

No 1147, Working Paper Series from European Central Bank

Abstract: This paper tests financial contagion due to interbank linkages. For identification we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications. JEL Classification: G21, G28, E58

Keywords: banking crisis; bank runs; contagion; deposit insurance; interbank market; liquidity dry-ups; macro-prudential analysis; systemic risk; wholesale depositors (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-ban and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Interbank Contagion at Work: Evidence from a Natural Experiment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101147

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