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

Author

Listed:
  • Hans Degryse

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

  • Grégory Nguyen

    (National Bank of Belgium)

Abstract

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.

Suggested Citation

  • Hans Degryse & Grégory Nguyen, 2007. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 123-171, June.
    • Handle: RePEc:ijc:ijcjou:y:2007:q:2:a:5
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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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