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Which interbank net is the safest?

Author

Listed:
  • Stefano Zedda

    () (University of Cagliari)

  • Simone Sbaraglia

    (University of Cagliari)

Abstract

In this paper, we aim at establishing some clear guidelines on which configuration of the interbank net can be most effective in limiting the banks’ default contagion risk. More specifically, based on real banks’ balance sheet data, we analyzed how the exposure concentration on specific counterparts can limit or enhance contagion, and which characteristics (variables) of the counterparts induce these differences. The analysis performed here is based on interbank exposures data, which only represent one of the contagion channels, but the same perspective can be generalized when considering, instead of the direct interbank exposures, the asymmetrical effects of a systemic crisis on the considered bank soundness (similar to what happens for the effect of interbank credit losses on a specific bank), or of the considered bank crisis to the whole system’s soundness (similar to the case of interbank default of the considered bank). Moreover, the simulation model as it is can be applied to both listed and nonlisted banks, since it is based purely on balance sheet data. Results suggest that, if we consider the whole interbank market, a high concentration of exposures can enhance contagion, and that, with reference to specific bank-to-bank exposures, the case in which small banks lend to larger and riskier banks is the most threatening for the system’s stability. These results can help regulators and supervisors keep the banking and financial system safe.

Suggested Citation

  • Stefano Zedda & Simone Sbaraglia, 2020. "Which interbank net is the safest?," Risk Management, Palgrave Macmillan, vol. 22(1), pages 65-82, March.
  • Handle: RePEc:pal:risman:v:22:y:2020:i:1:d:10.1057_s41283-019-00056-w
    DOI: 10.1057/s41283-019-00056-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Banking; Financial contagion; Monte Carlo simulation; Interbank net;
    All these keywords.

    JEL classification:

    • 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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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