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Interbank Contagion at Work: Evidence from a Natural Experiment

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  • Rajkamal Iyer
  • José-Luis Peydró

Abstract

This article 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. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 24 ()
Issue (Month): 4 ()
Pages: 1337-1377

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Handle: RePEc:oup:rfinst:v:24:y::i:4:p:1337-1377

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Cited by:
  1. Vaclav Hausenblas & Ivana Kubicova & Jitka Lesanovska, 2012. "Contagion Risk in the Czech Financial System: A Network Analysis and Simulation Approach," Working Papers 2012/14, Czech National Bank, Research Department.
  2. Bolos, Bradut & Bacarea, Vladimir & Marusteri, Marius, 2011. "Approaching Economic Issues through Epidemiology–An Introduction to Business Epidemiology," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 257-276, March.
  3. Trautmann, Stefan T. & Vlahu, Razvan, 2013. "Strategic loan defaults and coordination: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 747-760.
  4. Bhaskar DasGupta & Lakshmi Kaligounder, 2012. "On Global Stability of Financial Networks," Papers 1208.3789, arXiv.org, revised Aug 2014.
  5. Panetti, Ettore, 2011. "Financial liberalization and contagion with unobservable savings," MPRA Paper 29540, University Library of Munich, Germany.

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