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Contagion accounting

Author

Listed:
  • Aldasoro, Iñaki

    (Bank for International Settlements)

  • Hüser, Anne-Caroline

    (Bank of England)

  • Kok, Christoffer

    (European Central Bank)

Abstract

We provide a simple and tractable accounting-based stress-testing framework to assess loss dynamics in the banking sector, in a context of leverage targeting. Contagion can occur through direct interbank exposures, and indirect exposures due to overlapping portfolios with the associated price dynamics via fire sales. We apply the framework to three granular proprietary ECB data sets, including an interbank network of 26 large euro-area banks as well as their overlapping portfolios of loans, derivatives and securities. A five per cent shock to the price of assets held in the trading book leads to an initial loss of 30 per cent of system equity and an additional loss of 1.3 per cent due to fire sales spillovers. Direct interbank contagion is negligible in our analysis. Our findings underscore the importance of accurately estimating the price effects of fire sales.

Suggested Citation

  • Aldasoro, Iñaki & Hüser, Anne-Caroline & Kok, Christoffer, 2020. "Contagion accounting," Bank of England working papers 897, Bank of England.
    • Handle: RePEc:boe:boeewp:0897
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    References listed on IDEAS

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    More about this item

    Keywords

    Interbank networks; contagion; overlapping portfolios; fire sales; stress testing;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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