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Contagion in the interbank network: An epidemiological approach

  • Toivanen, Mervi


    (Financial Markets and Statistics, Bank of Finland)

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    This paper analyses the importance of individual bank-specific factors on financial stability. First, we use a novel method to model the spreading of the contagion in the interbank network by implementing an epidemiologic model. Actual data on European banks is exploited with simulated scale-free networks. The average contagion affected 70% and 40% of European banks’ total assets in 2007 and in 2010, respectively. Country-level results suggest that French, British, German and Spanish banks are the most contagious ones, whereas banks from Ireland, Greece and Portugal induce only limited negative effects. Secondly, cross-sectional panel estimations are performed to disentangle the leading indicators influencing the level of contagion. Bank clustering, large incoming interbank loans and bank reputation are more prominent explanatory variables than the size or leverage. Finally, central banks’ interventions reduce contagion only slightly.

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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2013.

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    Length: 41 pages
    Date of creation: 03 Sep 2013
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2013_019
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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