Credit Risk Interconnectedness: What Does the Market Really Know?

35 Pages Posted: 7 Nov 2015 Last revised: 22 Jan 2016

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Christian T. Brownlees

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE)

Christina Hans

Universitat Pompeu Fabra - Department of Economics and Business

Natalia Podlich

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: November 6, 2015

Abstract

We analyze the relation between market-based credit risk interconnectedness among banks during the crisis and the associated balance sheet linkages via funding and securities holdings. For identification, we use a proprietary dataset that has the funding positions of banks at the bank-to-bank level for 2006-13 in conjunction with investments of banks at the security level and the credit register from Germany. We find asymmetries both cross-sectionally and over time: when banks face difficulties to raise funding, the interbank lending affects market-based bank interconnectedness. Moreover, banks with investments in securities related to troubled classes have a higher credit risk interconnectedness. Overall, our results suggest that market-based measures of interdependence can serve well as risk monitoring tools in the absence of disaggregated high-frequency bank fundamental data.

Keywords: Credit Risk, Networks, CDS, Interbank Lending, Portfolio Distance

JEL Classification: C33, C53, E44, F36, G12, G14, G18, G21

Suggested Citation

Abbassi, Puriya and Brownlees, Christian T. and Hans, Christina and Podlich, Natalia, Credit Risk Interconnectedness: What Does the Market Really Know? (November 6, 2015). Available at SSRN: https://ssrn.com/abstract=2687283 or http://dx.doi.org/10.2139/ssrn.2687283

Puriya Abbassi

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Christian T. Brownlees (Contact Author)

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

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://84.89.132.1/~cbrownlees/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas 25-27
Barcelona, Catalonia 08014
Spain

Christina Hans

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

HOME PAGE: http://sites.google.com/site/hanschristina/

Natalia Podlich

Deutsche Bundesbank ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

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