Interbank lending and distress: Observables, unobservables, and network structure

Ben Craig, Michael Koetter and Ulrich Krüger

No 18/2014, Discussion Papers from Deutsche Bundesbank

Abstract: We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. We adapt a spatial probit model that allows for correlated error terms in the cross-sectional variation that depend on the measured network connections of the banks. The latter are in our application observed interbank exposures among German bank holding companies during 2001 and 2006. The results clearly indicate significant spillover effects between banks' probabilities of distress and the financial profiles of connected peers. Better capitalized and managed connections reduce the banks own risk. Higher network centrality reduces the probability of distress, supporting the notion that more complete networks tend to be more stable. Finally, spatial autocorrelation is significant and negative. This last result may indicate too-many-to-fail mechanics such that bank distress is less likely if many peers already experienced distress.

Keywords: Spatial Autoregression; interbank connections; bank risk (search for similar items in EconPapers)
JEL-codes: E31 G21 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Interbank Lending and Distress: Observables, Unobservables, and Network Structure (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:182014

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