Financial interlinkages and risk of contagion in the Finnish interbank market
AbstractUsing the maximum entropy method, this paper estimates the danger of contagion in the Finnish interbank market in 2005–2007 as well as the existence of contagion during a Finnish banking crisis. The contagion analysis of the early 1990s is able to predict the most troublesome and defaulting banks in the banking sector. The simulation results for 2005–2007 suggest that five of ten deposit banks are possible starting points for contagious effects. The magnitude of contagion is conditional on the first failing bank. In addition to large commercial banks, middle-sized banks also cause damaging domino effects. Over the last few years, the negative effects of contagion on the Finnish banking sector have been, on average, more limited than those of the early 1990s. The contagion is currently a low probability event in the Finnish interbank market.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 6/2009.
Length: 33 pages
Date of creation: 28 Jan 2009
Date of revision:
contagion; interbank markets; Finland; maximum entropy;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-14 (All new papers)
- NEP-BAN-2009-02-14 (Banking)
- NEP-EEC-2009-02-14 (European Economics)
- NEP-RMG-2009-02-14 (Risk Management)
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