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Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?

  • Upper, Christian
  • Worms, Andreas

Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate the matrix of bilateral credit relationships for the German banking system and test whether the breakdown of a single bank can lead to contagion. We find that the financial safety net (institutional guarantees for saving banks and cooperative banks) considerably reduces – but does not eliminate – the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15 % of the banking system in terms of assets.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 48 (2004)
Issue (Month): 4 (August)
Pages: 827-849

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Handle: RePEc:eee:eecrev:v:48:y:2004:i:4:p:827-849
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Craig Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," Proceedings 633, Federal Reserve Bank of Chicago.
  2. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
  3. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
  4. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  6. C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
  7. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
  8. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
  9. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," Scholarly Articles 12490629, Harvard University Department of Economics.
  10. 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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