Transmission Channels of Systemic Risk and Contagion in the European Financial Network

48 Pages Posted: 3 Sep 2014 Last revised: 15 Jan 2017

See all articles by Nikos Paltalidis

Nikos Paltalidis

Durham Business School

Dimitrios Gounopoulos

University of Bath

Renatas Kizys

Portsmouth Business School

Yiannis Koutelidakis

affiliation not provided to SSRN

Date Written: March 12, 2015

Abstract

We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.

Keywords: Systemic Risk, Maximum Entropy, Interbank Market, Financial Network, Sovereign Credit Risk, European Banks

JEL Classification: G21, D85, G01, F37, G28

Suggested Citation

Paltalidis, Nikos and Gounopoulos, Dimitrios and Kizys, Renatas and Koutelidakis, Yiannis, Transmission Channels of Systemic Risk and Contagion in the European Financial Network (March 12, 2015). Journal of Banking and Finance, Vol. 61, pp. S36-S52, December 2015 . Available at SSRN: https://ssrn.com/abstract=2490604 or http://dx.doi.org/10.2139/ssrn.2490604

Nikos Paltalidis (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Dimitrios Gounopoulos

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Renatas Kizys

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Yiannis Koutelidakis

affiliation not provided to SSRN

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