CoMap: Mapping Contagion in the Euro Area Banking Sector

66 Pages Posted: 17 Jan 2019

See all articles by Giovanni Covi

Giovanni Covi

European Central Bank (ECB); University of Verona

Mehmet Gorpe

International Monetary Fund (IMF)

Christoffer Kok

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2019

Abstract

This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We then develop a Contagion Mapping (CoMap) methodology to study contagion potential of an exogenous default shock via counterparty credit and funding risks. We construct contagion and vulnerability indices measuring respectively the systemic importance of banks and their degree of fragility. Decomposing the results into the respective contributions of credit and funding shocks provides insights to the nature of contagion which can be used to calibrate bank-specific capital and liquidity requirements and large exposures limits. We find that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics.

Keywords: systemic risk, network analysis, interconnectedness, large exposures, stress test, macroprudential policy

JEL Classification: D85, G17, G33, L14

Suggested Citation

Covi, Giovanni and Gorpe, Mehmet and Kok, Christoffer, CoMap: Mapping Contagion in the Euro Area Banking Sector (January 16, 2019). ECB Working Paper No. 2224. Available at SSRN: https://ssrn.com/abstract=3317360

Giovanni Covi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

Mehmet Gorpe

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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