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Contagion in the Interbank Market with Stochastic Loss Given Default

  • Christoph Memmel

    (Deutsche Bundesbank)

  • Angelika Sachs

    (LMU Munich)

  • Ingrid Stein

    (Deutsche Bundesbank)

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.

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

Volume (Year): 8 (2012)
Issue (Month): 3 (September)
Pages: 177-206

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Handle: RePEc:ijc:ijcjou:y:2012:q:3:a:5
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  1. Bastos, João A., 2010. "Forecasting bank loans loss-given-default," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2510-2517, October.
  2. Hans Degryse & Muhammad Ather Elahi & Maria Fabiana Penas, 2010. "Cross-Border Exposures and Financial Contagion," International Review of Finance, International Review of Finance Ltd., vol. 10(Financial), pages 209-240.
  3. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
  4. Iman van Lelyveld & Franka Liedorp, 2004. "Interbank Contagion in the Dutch Banking Sector," DNB Working Papers 005, Netherlands Central Bank, Research Department.
  5. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  6. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers 79, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Stolz, Stéphanie Marie & Wedow, Michael, 2010. "Extraordinary measures in extraordinary times – Public measures in support of the financial sector in the EU and the United States," Occasional Paper Series 117, European Central Bank.
  8. Aikman, David & Alessandri, Piergiorgio & Eklund, Bruno & Gai, Prasanna & Kapadia, Sujit & Martin, Elizabeth & Mora, Nada & Sterne, Gabriel & Willison, Matthew, 2009. "Funding liquidity risk in a quantitative model of systemic stability," Bank of England working papers 372, Bank of England.
  9. Christoph Memmel & Ingrid Stein, 2008. "European Data Watch: The Deutsche Bundesbank’s prudential database (BAKIS)," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 128(2), pages 321-328.
  10. Paolo Emilio Mistrulli, 2007. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Temi di discussione (Economic working papers) 641, Bank of Italy, Economic Research and International Relations Area.
  11. Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
  12. Kavonius, Ilja Kristian & Castrén, Olli, 2009. "Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area," Working Paper Series 1124, European Central Bank.
  13. Christian Schmieder, 2006. "European Data Watch: The Deutsche Bundesbank’s large credit database (BAKIS-M and MiMiK)," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 126(4), pages 653-663.
  14. Juan Sole & Marco A Espinosa-Vega, 2010. "Cross-Border Financial Surveillance; A Network Perspective," IMF Working Papers 10/105, International Monetary Fund.
  15. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
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