Financial Contagion Through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis
Thierry Tressel
No 2010/236, IMF Working Papers from International Monetary Fund
Abstract:
The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.
Keywords: WP; interbank market; asset; Financial Contagion; Deleveraging; Funding Shocks; Network Analysis; bank level; banks liability; bank capital outflow; bank assets; parent bank; risk exposure; Foreign banks; Commercial banks; Foreign currency exposure; Emerging and frontier financial markets; Asset liquidity; Eastern Europe; Central and Eastern Europe; Global (search for similar items in EconPapers)
Pages: 37
Date: 2010-10-01
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Citations: View citations in EconPapers (25)
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