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Contagiousness and Vulnerability in the Austrian Interbank Market

  • Claus Puhr

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Reinhardt Seliger

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Michael Sigmund

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

Registered author(s):

    The purpose of this paper is to analyze (hypothetical) contagious bank defaults, i.e. defaults not caused by the fundamental weakness of a given bank but triggered by failures in the banking system. As failing banks become unable to honor their commitments on the interbank market, they may cause other banks to default, which may in turn push even more banks over the edge in so-called default cascades. In our paper we distinguish between contagiousness (the share of total banking assets represented by those banks that a specific bank brings down by contagion) and vulnerability (the number of banks by which a bank is brought down by cascading failures). Our analysis consists of three steps: first, we analyze the structure of the Austrian interbank market from end-2008 to end-2011. Second, we run (hypothetical) default simulations based on Eisenberg and Noe (2001) for the same set of banks. Finally, we estimate a panel data model to explain the (hypothetical) defaults generated by these simulations with the underlying structure of the network using network indicators that reflect (i) the network as a whole, (ii) a subnetwork or cluster, and (iii) the node level based on banks’ interbank lending relationships. As a result we find strong correlations between a bank’s position in the Austrian interbank market and its likelihood of either causing contagion or being affected by contagion. Although our analysis is based on a dataset constrained to the interbank market of unconsolidated Austrian banks, we believe our findings could be verified by analyzing other banking systems (albeit with a different model calibration). Given the importance of identifying systemically important banks for the formulation of macroprudential policy, we believe that our analysis has the potential to improve our assessment with regard to second-round effects and default cascades in the interbank market.

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    Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.

    Volume (Year): (2012)
    Issue (Month): 24 ()
    Pages: 62-78

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    Handle: RePEc:onb:oenbfs:y:2012:i:24:b:2
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    1. Michael Boss & Gerald Krenn & Claus Puhr & Martin Summer, 2006. "Systemic Risk Monitor: A Model for Systemic Risk Analysis and Stress Testing of Banking Systems," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 11, pages 83-95.
    2. 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.
    3. Piergiorgio Alessandri & Prasanna Gai & Sujit Kapadia & Nada Mora & Claus Puhr, 2009. "Towards a Framework for Quantifying Systemic Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 47-81, September.
    4. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
    5. Leinonen (ed), Harry, 2007. "Simulation studies of liquidity needs, risks and efficiency in payment networks," Scientific Monographs E:39/2007, Bank of Finland.
    6. Mark E Schaffer & Steven Stillman, 2006. "XTOVERID: Stata module to calculate tests of overidentifying restrictions after xtreg, xtivreg, xtivreg2, xthtaylor," Statistical Software Components S456779, Boston College Department of Economics, revised 22 Feb 2015.
    7. Leinonen (ed), Harry, 2009. "Simulation analyses and stress testing of payment networks," Scientific Monographs E:42/2009, Bank of Finland.
    8. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    9. C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
    10. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers 79, Oesterreichische Nationalbank (Austrian Central Bank).
    11. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    12. 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.
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