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On the origin of systemic risk


  • Montagna, Mattia
  • Torri, Gabriele
  • Covi, Giovanni


Systemic risk in the banking sector is usually associated with long periods of economic downturn and very large social costs. On one hand, shocks coming from correlated exposures towards the real economy may induce correlation in banks' default probabilities thereby increasing the likelihood for systemic-tail events like the 2008 Great Financial Crisis. On the other hand, financial contagion also plays an important role in generating large-scale market failures, amplifying the initial shocks coming from the real economy. To study the sources of these rare phenomena, we propose a new definition of systemic risk (i.e. the probability of a large number of banks going into distress simultaneously) and thus we develop a multilayer microstructural model to study empirically the determinants of systemic risk. The model is then calibrated on the most comprehensive granular dataset for the euro area banking sector, capturing roughly 96% or EUR 23.2 trillion of euro area banks' total assets over the period 2014-2018. The output of the model decompose and quantify the sources of systemic risk showing that correlated economic shocks, financial contagion mechanisms, and their interaction are the main sources of systemic events. The results obtained with the simulation engine resemble common market-based systemic risk indicators and empirically corroborate findings from existing literature. This framework gives regulators and central bankers a tool to study systemic risk and its developments, pointing out that systemic events and banks’ idiosyncratic defaults have different drivers, hence implying different policy responses. JEL Classification: D85, G17, G33, L14

Suggested Citation

  • Montagna, Mattia & Torri, Gabriele & Covi, Giovanni, 2020. "On the origin of systemic risk," Working Paper Series 2502, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20202502
    Note: 2586289

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    References listed on IDEAS

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    Cited by:

    1. Dotta, Vitor, 2022. "Addressing systemic risk in Europe during Covid-19: The role of regulation and the policy mix," IPE Working Papers 181/2022, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    2. Berger, Allen N. & Curti, Filippo & Mihov, Atanas & Sedunov, John, 2022. "Operational Risk is More Systemic than You Think: Evidence from U.S. Bank Holding Companies," Journal of Banking & Finance, Elsevier, vol. 143(C).
    3. Torri, Gabriele & Giacometti, Rosella & Tichý, Tomáš, 2021. "Network tail risk estimation in the European banking system," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    4. Sydow, Matthias & Schilte, Aurore & Covi, Giovanni & Deipenbrock, Marija & Del Vecchio, Leonardo & Fiedor, Paweł & Fukker, Gábor & Gehrend, Max & Gourdel, Régis & Grassi, Alberto & Hilberg, Björn & Ka, 2021. "Shock amplification in an interconnected financial system of banks and investment funds," Working Paper Series 2581, European Central Bank.
    5. William Schueller & Christian Diem & Melanie Hinterplattner & Johannes Stangl & Beate Conrady & Markus Gerschberger & Stefan Thurner, 2022. "Propagation of disruptions in supply networks of essential goods: A population-centered perspective of systemic risk," Papers 2201.13325,
    6. Torri, Gabriele & Radi, Davide & Dvořáčková, Hana, 2022. "Catastrophic and systemic risk in the non-life insurance sector: A micro-structural contagion approach," Finance Research Letters, Elsevier, vol. 47(PB).
    7. Belloni, Marco & Kuik, Friderike & Mingarelli, Luca, 2022. "Euro Area banks' sensitivity to changes in carbon price," Working Paper Series 2654, European Central Bank.

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    More about this item


    financial contagion; microstructural models; systemic risk;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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    This paper has been announced in the following NEP Reports:


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