Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?

Christian Upper and Andreas Worms

No 2002,09, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate the matrix of bilateral credit relationships for the German banking system and test whether the breakdown of a single bank can lead to contagion. We find that the financial safety net (institutional guarantees for saving banks and cooperative banks) considerably reduces - but does not eliminate - the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15 % of the banking system in terms of assets.

Keywords: contagion; interbank market; regulation of banks (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (78)

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Related works:
Journal Article: Estimating bilateral exposures in the German interbank market: Is there a danger of contagion? (2004)
Chapter: Estimating bilateral exposures in the German interbank market: is there a danger of contagion? (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:4174

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