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Contagion in the Interbank Market with Stochastic Loss Given Default

Author

Listed:
  • Christoph Memmel

    (Deutsche Bundesbank)

  • Angelika Sachs

    (LMU Munich)

  • Ingrid Stein

    (Deutsche Bundesbank)

Abstract

This paper investigates contagion in the German interbank market under the assumption of a stochastic loss given default (LGD). We combine a unique data set about the LGD of interbank loans with detailed data about interbank exposures. We find that the frequency distribution of the LGD is markedly U-shaped. Our simulations show that contagion in the German interbank market may happen. For the point in time under consideration, the assumption of a stochastic LGD leads on average to a more fragile banking system than under the assumption of a constant LGD.

Suggested Citation

  • Christoph Memmel & Angelika Sachs & Ingrid Stein, 2012. "Contagion in the Interbank Market with Stochastic Loss Given Default," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 177-206, September.
    • Handle: RePEc:ijc:ijcjou:y:2012:q:3:a:5
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    Cited by:

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    2. Gerardo Ferrara & Sam Langfield & Zijun Liu & Tomohiro Ota, 2019. "Systemic illiquidity in the interbank network," Quantitative Finance, Taylor & Francis Journals, vol. 19(11), pages 1779-1795, November.
    3. Alesia Kalbaska & Cesario Mateus, 2019. "From sovereigns to banks: evidence on cross-border contagion," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 86-103, March.
    4. Markus Brunnermeier & Laurent Clerc & Yanis El Omari & Silvia Gabrieli & Steffen Kern & Christoph Memmel & Tuomas Peltonen & Natalia Podlich & Martin Scheicher & Guillaume Vuillemey, 2013. "Assessing contagion risks from the CDS market," ESRB Occasional Paper Series 04, European Systemic Risk Board.
    5. Memmel, Christoph & Sachs, Angelika, 2013. "Contagion in the interbank market and its determinants," Journal of Financial Stability, Elsevier, vol. 9(1), pages 46-54.
    6. Carro, Adrian & Stupariu, Patricia, 2024. "Uncertainty, non-linear contagion and the credit quality channel: An application to the Spanish interbank market," Journal of Financial Stability, Elsevier, vol. 71(C).
    7. Grundke, Peter & Kühn, André, 2020. "The impact of the Basel III liquidity ratios on banks: Evidence from a simulation study," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 167-190.
    8. Ivan Alves & Stijn Ferrari & Pietro Franchini & Jean-Cyprien Heam & Pavol Jurca & Sam Langfield & Sebastiano Laviola & Franka Liedorp & Antonio Sánchez & Santiago Tavolaro & Guillaume Vuillemey, 2013. "The structure and resilience of the European interbank market," ESRB Occasional Paper Series 03, European Systemic Risk Board.
    9. Bátiz-Zuk Enrique & Lara Sánchez José Luis, 2021. "Revisiting the link between systemic risk and competition based on network theory and interbank exposures," Working Papers 2021-26, Banco de México.
    10. repec:zbw:bofrdp:2013_019 is not listed on IDEAS
    11. Vuillemey, Guillaume & Peltonen, Tuomas A., 2015. "Disentangling the bond–CDS nexus: A stress test model of the CDS market," Economic Modelling, Elsevier, vol. 49(C), pages 32-45.
    12. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    13. Toivanen, Mervi, 2013. "Contagion in the interbank network: An epidemiological approach," Bank of Finland Research Discussion Papers 19/2013, Bank of Finland.
    14. Ameha Tefera Tessema & Jan Walters Kruger, 2017. "An Improvement on An Interest Rate Commission Agent Banking System Model (AIRCABS Model)," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 685-705.
    15. Sun, Lixin, 2020. "Financial networks and systemic risk in China's banking system," Finance Research Letters, Elsevier, vol. 34(C).
    16. Carsten Chong & Claudia Kluppelberg, 2017. "Contagion in financial systems: A Bayesian network approach," Papers 1702.04287, arXiv.org, revised Jul 2017.
    17. Toivanen, Mervi, 2013. "Contagion in the interbank network : An epidemiological approach," Research Discussion Papers 19/2013, Bank of Finland.
    18. Batiz-Zuk, Enrique & López-Gallo, Fabrizio & Martínez-Jaramillo, Serafín & Solórzano-Margain, Juan Pablo, 2016. "Calibrating limits for large interbank exposures from a system-wide perspective," Journal of Financial Stability, Elsevier, vol. 27(C), pages 198-216.
    19. Bátiz-Zuk, Enrique & Lara-Sánchez, José Luis, 2023. "The impact of bank competition on contagion risk: The case of Mexico," Journal of Economics and Business, Elsevier, vol. 127(C).

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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