Do Financial Markets Expect Bank Defaults to be Contagious?
AbstractSimultaneous bank defaults are often attributed to interbank contagion, but can also be due to common shocks affecting banks with similar balance sheets. We disentangle both effects by realising that if financial markets expect a bank's default to be contagious, an increase in this bank's default probability should lower other banks' market valuations. When we regress changes in banks' market values on changes in other banks' default probabilities for the 2007-2009 financial crisis, we find no evidence for such an effect. This finding suggests that contagion risk has been overestimated, which has implications for financial regulation and crisis management.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 274.
Date of creation: Dec 2010
Date of revision:
interbank contagion; financial stability; systemic banks; global financial crisis;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Iman van Lelyveld & Franka Liedorp, 2004.
"Interbank Contagion in the Dutch Banking Sector,"
DNB Working Papers
005, Netherlands Central Bank, Research Department.
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