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Contagion in financial networks: A threat index

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  • Demange, Gabrielle

Abstract

An intricate web of claims and obligations ties together the balance sheets of a wide variety of financial institutions. Under the occurrence of default, these interbank claims generate externalities across institutions and possibly disseminate defaults and bankruptcy. Building on a simple model for the joint determination of the repayments of interbank claims, this paper introduces a measure of the threat that a bank poses to the system. Such a measure, called threat index, may be helpful to determine how to inject cash into banks so as to increase debt reimbursement, or to assess the contributions of individual institutions to the risk in the system. Although the threat index and the default level of a bank both reflect some form of weakness and are affected by the whole liability network, the two indicators differ. As a result, injecting cash into the banks with the largest default level may not be optimal.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8793.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8793

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Keywords: bankruptcy; contagion; Contagion in financial networks : a threat index; financial linkages; systemic risk;

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  1. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2004. "Who's Who in Networks. Wanted: The Key Player," Working Papers 178, Barcelona Graduate School of Economics.
  2. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
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  9. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
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Cited by:
  1. Christian Gouriéroux & Jean-Cyprien Heam & Alain Monfort, 2013. "Liquidation Equilibrium with Seniority and Hidden CDO," Working Papers 2013-06, Centre de Recherche en Economie et Statistique.

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