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Interbank contagion at work: evidence from a natural experiment

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  • Iyer, Rajkamal
  • Peydró, José-Luis

Abstract

This paper 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. JEL Classification: G21, G28, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1147.

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Date of creation: Jan 2010
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Handle: RePEc:ecb:ecbwps:20101147

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Related research

Keywords: Bank runs; banking crisis; Contagion; Deposit Insurance; Interbank Market; liquidity dry-ups; macro-prudential analysis; systemic risk; wholesale depositors;

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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. Stefan Trautmann & Razvan Vlahu, 2011. "Strategic Loan Defaults and Coordination: An Experimental Analysis," DNB Working Papers 312, Netherlands Central Bank, Research Department.
  4. Panetti, Ettore, 2011. "Financial liberalization and contagion with unobservable savings," MPRA Paper 29540, University Library of Munich, Germany.
  5. Bhaskar DasGupta & Lakshmi Kaligounder, 2012. "On Global Stability of Financial Networks," Papers 1208.3789, arXiv.org, revised Jan 2014.

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