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Contagion at the interbank market with stochastic LGD

  • Memmel, Christoph
  • Sachs, Angelika
  • Stein, Ingrid

This paper investigates contagion at the German interbank market under the assumption of a stochastic loss given default (LGD). We combine a unique data set about the LGD of interbank loans with data about interbank exposures. We find that the frequency distribution of the LGD is u-shaped. Under the assumption of a stochastic LGD, simulation results show a more fragile banking system than under the assumption of a constant LGD. There are three types of banks concerning their tendency to trigger contagion: banks with strongly varying impact, banks whose impact is relatively constant, and banks with no direct impact.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2011,06.

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Date of creation: 2011
Date of revision:
Handle: RePEc:zbw:bubdp2:201106
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  1. Marco A. Espinosa-Vega & Juan Solé, 2011. "Cross-border financial surveillance: a network perspective," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(3), pages 182-205, August.
  2. Iman van Lelyveld & Franka Liedorp, 2004. "Interbank Contagion in the Dutch Banking Sector," DNB Working Papers 005, Netherlands Central Bank, Research Department.
  3. Jorge A. Chan-Lau, 2010. "Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems," IMF Working Papers 10/107, International Monetary Fund.
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