IDEAS home Printed from https://ideas.repec.org/a/onb/oenbfs/y2012i24b2.html
   My bibliography  Save this article

Contagiousness and Vulnerability in the Austrian Interbank Market

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Claus Puhr & Reinhardt Seliger & Michael Sigmund, 2012. "Contagiousness and Vulnerability in the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 24, pages 62-78.
  • Handle: RePEc:onb:oenbfs:y:2012:i:24:b:2
    as

    Download full text from publisher

    File URL: https://www.oenb.at/dam/jcr:51b01295-493e-4d5a-a5e4-6f59f572eea5/fsr_24_special_topics_02_tcm16-252042.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
    2. 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.
    3. 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, pages 317-333.
    4. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, pages 1301-1314.
    5. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, pages 827-849.
    6. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
    7. Leinonen, Harry, 2009. "Simulation analyses and stress testing of payment networks," Scientific Monographs, Bank of Finland, number 2009_042, November.
    8. 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.
    9. 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 05 Jan 2016.
    10. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    11. 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.
    12. N. Lesca, 2010. "Introduction," Post-Print halshs-00640602, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kanno, Masayasu, 2015. "Assessing systemic risk using interbank exposures in the global banking system," Journal of Financial Stability, Elsevier, vol. 20(C), pages 105-130.
    2. Caccioli, Fabio & Farmer, J. Doyne & Foti, Nick & Rockmore, Daniel, 2015. "Overlapping portfolios, contagion, and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 50-63.
    3. Poledna, Sebastian & Molina-Borboa, José Luis & Martínez-Jaramillo, Serafín & van der Leij, Marco & Thurner, Stefan, 2015. "The multi-layer network nature of systemic risk and its implications for the costs of financial crises," Journal of Financial Stability, Elsevier, vol. 20(C), pages 70-81.
    4. Pawe{l} Smaga & Mateusz Wili'nski & Piotr Ochnicki & Piotr Arendarski & Tomasz Gubiec, 2016. "Can banks default overnight? Modeling endogenous contagion on O/N interbank market," Papers 1603.05142, arXiv.org.
    5. Kanno, Masayasu, 2016. "The network structure and systemic risk in the global non-life insurance market," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 38-53.
    6. Fabio Caccioli & J. Doyne Farmer & Nick Foti & Daniel Rockmore, 2013. "How interbank lending amplifies overlapping portfolio contagion: A case study of the Austrian banking network," Papers 1306.3704, arXiv.org.
    7. Paul Glasserman, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    8. Glasserman, Paul & Young, H. Peyton, 2016. "Contagion in financial networks," LSE Research Online Documents on Economics 68681, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Interbank market; network indicators; contagion; panel analysis;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:onb:oenbfs:y:2012:i:24:b:2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stefan W. Schmitz). General contact details of provider: http://edirc.repec.org/data/oenbbat.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.