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Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System

  • Hans Degryse

    (CentER–Tilburg University, TILEC and K.U. Leuven)

  • Grégory Nguyen

    (National Bank of Belgium)

Robust (cross-border) interbank markets are important for the proper functioning of modern financial systems. However, a network of interbank exposures may lead to domino effects following the event of an initial bank failure. We investigate the evolution and determinants of contagion risk for the Belgian banking system over the period 1993–2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposures, and cross-border interbank exposures. The "structure" of the interbank market affects contagion risk. We find that a change from a complete structure (where all banks have symmetric links) toward a "multiplemoney-center" structure (where money centers are symmetrically linked to otherwise disconnected banks) has decreased the risk and impact of contagion. In addition, an increase in the relative importance of cross-border interbank exposures has lowered local contagion risk. However, this reduction may have been compensated by an increase in contagion risk stemming from foreign banks.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 2 (June)
Pages: 123-171

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Handle: RePEc:ijc:ijcjou:y:2007:q:2:a:5
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