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Contagion in financial networks: A threat index

  • Demange, Gabrielle

An intricate web of claims and obligations ties together the balance sheets of a wide variety of financial institutions. Under the occurrence of default, these interbank claims generate externalities across institutions and possibly disseminate defaults and bankruptcy. Building on a simple model for the joint determination of the repayments of interbank claims, this paper introduces a measure of the threat that a bank poses to the system. Such a measure, called threat index, may be helpful to determine how to inject cash into banks so as to increase debt reimbursement, or to assess the contributions of individual institutions to the risk in the system. Although the threat index and the default level of a bank both reflect some form of weakness and are affected by the whole liability network, the two indicators differ. As a result, injecting cash into the banks with the largest default level may not be optimal.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8793.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8793
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  1. Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
  2. Gouriéroux, Christian & Héam, Jean-Cyprien & Monfort, Alain, 2012. "Bilateral exposures and systemic solvency risk," Economics Papers from University Paris Dauphine 123456789/14967, Paris Dauphine University.
  3. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2010. "Attributing systemic risk to individual institutions," BIS Working Papers 308, Bank for International Settlements.
  4. Leo Katz, 1953. "A new status index derived from sociometric analysis," Psychometrika, Springer, vol. 18(1), pages 39-43, March.
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