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Insolvency and contagion in the Brazilian interbank market

Author

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  • Souza, Sergio R.S.
  • Tabak, Benjamin M.
  • Silva, Thiago C.
  • Guerra, Solange M.

Abstract

This paper proposes a new way to model and analyze contagion in interbank networks. We use a unique dataset from the Brazilian financial system and include all active financial intermediaries. We show that the contagion chain has a short propagation path. We find that first-round contagion is generated only by banks and that medium-sized banks can generate contagion, which implies that size is not the sole determinant of importance within networks. Most vulnerable financial institutions are not banks. Finally, we compute a lower bound for the financial system expected losses in a 1-year horizon. The results contribute to the development of a financial stability-monitoring toolkit.

Suggested Citation

  • Souza, Sergio R.S. & Tabak, Benjamin M. & Silva, Thiago C. & Guerra, Solange M., 2015. "Insolvency and contagion in the Brazilian interbank market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 431(C), pages 140-151.
    • Handle: RePEc:eee:phsmap:v:431:y:2015:i:c:p:140-151
    DOI: 10.1016/j.physa.2015.03.005
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    13. Machado, Vicente da Gama & Portugal, Marcelo Savino, 2014. "Measuring inflation persistence in Brazil using a multivariate model," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(2), June.
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    17. Thiago Christiano Silva & Michel Alexandre da Silva & Benjamin Miranda Tabak, 2016. "Modeling Financial Networks: a feedback approach," Working Papers Series 438, Central Bank of Brazil, Research Department.
    18. Yao, Yanzhen & Li, Jianping & Zhu, Xiaoqian & Wei, Lu, 2017. "Expected default based score for identifying systemically important banks," Economic Modelling, Elsevier, vol. 64(C), pages 589-600.
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