IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v24yi4p1337-1377.html
   My bibliography  Save this article

Interbank Contagion at Work: Evidence from a Natural Experiment

Author

Listed:
  • Rajkamal Iyer
  • José-Luis Peydró

Abstract

This article tests financial contagion due to interbank linkages. For identification, we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Rajkamal Iyer & José-Luis Peydró, 2011. "Interbank Contagion at Work: Evidence from a Natural Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1337-1377.
    • Handle: RePEc:oup:rfinst:v:24:y::i:4:p:1337-1377
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhp105
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Furfine, Craig, 2002. "The interbank market during a crisis," European Economic Review, Elsevier, vol. 46(4-5), pages 809-820, May.
    2. Masahiro Okuno-Fujiwara & Andrew Postlewaite & Kotaro Suzumura, 1990. "Strategic Information Revelation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 25-47.
    3. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May.
    4. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    5. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    6. Charles A. E. Goodhart, 1995. "The Central Bank and the Financial System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071673, December.
    7. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
    8. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 89-112, January.
    9. C. A. E. Goodhart, 1995. "The Central Bank and the Financial System," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-37915-2, August.
    10. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    11. Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Economic Review, Federal Reserve Bank of Richmond, vol. 74(May), pages 3-22.
    12. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    13. Philipp Hartmann & Stefan Straetmans & Casper de Vries, 2007. "Banking System Stability. A Cross-Atlantic Perspective," NBER Chapters, in: The Risks of Financial Institutions, pages 133-188, National Bureau of Economic Research, Inc.
    14. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, April.
    15. Goldstein, Morris & Kaminsky, Graciela L. & Reinhart , Carmen M., 2000. "Assessing Financial Vulnerability in Emerging Economies: A Summary of Empirical Results," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 4(2), pages 101-147, June.
    16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    17. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174, National Bureau of Economic Research, Inc.
    18. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-781, December.
    19. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
    20. Swary, Itzhak, 1986. "Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis," The Journal of Business, University of Chicago Press, vol. 59(3), pages 451-473, July.
    21. Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-1442, September.
    22. Schumacher, Liliana, 2000. "Bank runs and currency run in a system without a safety net: Argentina and the 'tequila' shock," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 257-277, August.
    23. Vasso Ioannidou & Steven Ongena & José-Luis Peydró, 2015. "Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment," Review of Finance, European Finance Association, vol. 19(1), pages 95-144.
    24. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, July.
    25. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    26. Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, vol. 5(4), pages 409-423, October.
    27. Sandro Brusco & Fabio Castiglionesi, 2007. "Liquidity Coinsurance, Moral Hazard, and Financial Contagion," Journal of Finance, American Finance Association, vol. 62(5), pages 2275-2302, October.
    28. Dong Lee & Bong-Chan Kho & Rene M. Stulz, 2000. "U.S. Banks, Crises, and Bailouts: From Mexico to LTCM," American Economic Review, American Economic Association, vol. 90(2), pages 28-31, May.
    29. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    30. Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, vol. 60(6), pages 2925-2953, December.
    31. Aharony, Joseph & Swary, Itzhak, 1983. "Contagion Effects of Bank Failures: Evidence from Capital Markets," The Journal of Business, University of Chicago Press, vol. 56(3), pages 305-322, July.
    32. 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.
    33. repec:bla:jfinan:v:43:y:1988:i:3:p:749-61 is not listed on IDEAS
    34. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    35. Cormac O Grada & Morgan Kelly, 2000. "Market Contagion: Evidence from the Panics of 1854 and 1857," American Economic Review, American Economic Association, vol. 90(5), pages 1110-1124, December.
    36. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    37. Raghuram G. Rajan, 2006. "Has Finance Made the World Riskier?," European Financial Management, European Financial Management Association, vol. 12(4), pages 499-533, September.
    38. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
    39. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1, July.
    40. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    41. Calomiris, Charles W & Mason, Joseph R, 1997. "Contagion and Bank Failures during the Great Depression: The June 1932 Chicago Banking Panic," American Economic Review, American Economic Association, vol. 87(5), pages 863-883, December.
    42. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    43. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-592, June.
    44. Bhattacharya, Sudipto & Fulghieri, Paolo, 1994. "Uncertain liquidity and interbank contracting," Economics Letters, Elsevier, vol. 44(3), pages 287-294.
    45. Itay Goldstein & Ady Pauzner, 2005. "Demand–Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
    46. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    47. Atif Mian, 2006. "Distance Constraints: The Limits of Foreign Lending in Poor Economies," Journal of Finance, American Finance Association, vol. 61(3), pages 1465-1505, June.
    48. Ongena, Steven & Smith, David C. & Michalsen, Dag, 2003. "Firms and their distressed banks: lessons from the Norwegian banking crisis," Journal of Financial Economics, Elsevier, vol. 67(1), pages 81-112, January.
    49. Aharony, Joseph & Swary, Itzhak, 1996. "Additional evidence on the information-based contagion effects of bank failures," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 57-69, January.
    50. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174, Central Bank of Chile.
    51. Vives, Xavier, 2004. "Complementarities and Games: New Developments," CEPR Discussion Papers 4742, C.E.P.R. Discussion Papers.
    52. Jie Gan, 2007. "The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1941-1973, November.
    53. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-824, November.
    54. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    55. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    56. Charles W. Calomiris & Joseph R. Mason, 2003. "Fundamentals, Panics, and Bank Distress During the Depression," American Economic Review, American Economic Association, vol. 93(5), pages 1615-1647, December.
    57. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. "The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-266, March.
    58. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
    59. repec:bla:jfinan:v:53:y:1998:i:4:p:1245-1284 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michiel Bijlsma & Wim Suyker, 2008. "The credit crisis and the Dutch economy... in eight frequently asked questions," CPB Memorandum 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Michiel Bijlsma & Jeroen Klomp & Sijmen Duineveld, 2010. "Systemic risk in the financial sector; a review and synthesis," CPB Document 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    4. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 978-995, December.
    5. Kox, Henk L.M. & Leeuwen, George van, 2012. "Dynamic market selection in EU business services," MPRA Paper 41016, University Library of Munich, Germany.
    6. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    7. Rajkamal Iyer & Manju Puri, 2012. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," American Economic Review, American Economic Association, vol. 102(4), pages 1414-1445, June.
    8. Committee, Nobel Prize, 2022. "Financial Intermediation and the Economy," Nobel Prize in Economics documents 2022-2, Nobel Prize Committee.
    9. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2012. "Contagious Bank Runs: Experimental Evidence," Working Papers on Finance 1207, University of St. Gallen, School of Finance.
    10. 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.
    11. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    12. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    13. Martin Brown & Stefan T. Trautmann & Razvan Vlahu, 2017. "Understanding Bank-Run Contagion," Management Science, INFORMS, vol. 63(7), pages 2272-2282, July.
    14. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2012. "Contagious Bank Runs: Experimental Evidence," Working Papers on Finance 1207, University of St. Gallen, School of Finance.
    15. Acharya, Viral & Yorulmazer, Tanju, 2003. "Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk," CEPR Discussion Papers 3743, C.E.P.R. Discussion Papers.
    16. Skeie, David R., 2008. "Banking with nominal deposits and inside money," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 562-584, October.
    17. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    18. Moheeput, Ashwin, 2008. "Financial Systems, Micro-Systemic Risks and Central Bank Policy : An Analytical Taxonomy of the Literature," The Warwick Economics Research Paper Series (TWERPS) 856, University of Warwick, Department of Economics.
    19. Kristian Blickle & Markus Brunnermeier & Stephan Luck, 2024. "Who Can Tell Which Banks Will Fail?," The Review of Financial Studies, Society for Financial Studies, vol. 37(9), pages 2685-2731.
    20. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    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:oup:rfinst:v:24:y::i:4:p:1337-1377. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.