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Interbank Linkages and Contagion Risk in the Portuguese Banking System

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  • Lara Mónica Machado Fernandes
  • Maria Rosa Borges
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    Abstract

    Interbank money markets play a fundamental role in financial systems but they can also be a channel through which problems in one institution can spread to the remaining ones. In particular, the potential for contagion stemming from interbank money markets is closely related with the pattern of interbank lending relationships. In this study, we characterize the Portuguese overnight interbank money market between 1999 and 2009 and analyze its inherent potential for contagion, based on bilateral interbank exposures. We conclude that: (i) the Portuguese overnight interbank money market has a multiple money center structure, where some banks have, simultaneously, an important role as lenders as well as borrowers; (ii) although unlikely, the failure of one institution can have contagion effects, pushing others into failure; (iii) however, even under the most extreme assumptions, banks that fail by contagion represent less than 10 per cent of the total banking systems assets.

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    Bibliographic Info

    Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2013/23.

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    Date of creation: Dec 2013
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    Handle: RePEc:ise:isegwp:wp232013

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    Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
    Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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    Keywords: Money market; Interbank lending; Financial contagion;

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    14. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
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    16. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
    17. Toivanen, Mervi, 2009. "Financial interlinkages and risk of contagion in the Finnish interbank market," Research Discussion Papers 6/2009, Bank of Finland.
    18. George Sheldon & Martin Maurer, 1998. "Interbank Lending and Systemic Risk: An Empirical Analysis for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 685-704, December.
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