Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion?

Deutsche Bundesbank Discussion Paper No 09/02

36 Pages Posted: 1 May 2002

See all articles by Christian Upper

Christian Upper

Bank for International Settlements (BIS)

Andreas Worms

Deutsche Bundesbank, Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate the matrix of bilateral credit relationships for the German banking system and test whether the breakdownof a single bank can lead to contagion. We find that the financial safety net (institutional guarantees for saving banks and cooperative banks) considerably reduces - but does not eliminate - the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15% of the banking system in terms of assets.

Keywords: contagion, interbank market, regulation of banks

JEL Classification: G21, G28

Suggested Citation

Upper, Christian and Worms, Andreas, Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion? (February 2002). Deutsche Bundesbank Discussion Paper No 09/02, Available at SSRN: https://ssrn.com/abstract=304454 or http://dx.doi.org/10.2139/ssrn.304454

Christian Upper

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Andreas Worms (Contact Author)

Deutsche Bundesbank, Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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