Interbank Contagion at Work: Evidence from a Natural Experiment

66 Pages Posted: 26 Jan 2010

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2010

Abstract

This paper tests financial contagion due to interbank linkages. For identification we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications.

Keywords: Contagion, Systemic Risk, Macro-Prudential Analysis, Deposit Insurance, Interbank Market, Wholesale Depositors, Bank Runs, Banking Crisis, Liquidity Dry-ups

JEL Classification: G21, G28, E58

Suggested Citation

Iyer, Rajkamal and Peydro, Jose-Luis, Interbank Contagion at Work: Evidence from a Natural Experiment (January 21, 2010). ECB Working Paper No. 1147, Available at SSRN: https://ssrn.com/abstract=1532295 or http://dx.doi.org/10.2139/ssrn.1532295

Rajkamal Iyer (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
149
Abstract Views
3,264
Rank
53,879
PlumX Metrics