Interconnected Banks and Systemically Important Exposures

51 Pages Posted: 21 Nov 2019

See all articles by Alan Roncoroni

Alan Roncoroni

University of Zurich - Department of Banking and Finance

Stefano Battiston

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; Ca Foscari University of Venice

Marco D'Errico

University of Zurich; European Systemic Risk Board

Grzegorz Hałaj

Government of Canada - Bank of Canada

Christoffer Kok

European Central Bank (ECB)

Date Written: November, 2019

Abstract

We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union.

Keywords: bank stress test, cross-border contagion channels, financial contagion, financial networks, financial stability, systemic risk

JEL Classification: C45, C63, D85, G21

Suggested Citation

Roncoroni, Alan and Battiston, Stefano and D'Errico, Marco and Hałaj, Grzegorz and Kok, Christoffer, Interconnected Banks and Systemically Important Exposures (November, 2019). ECB Working Paper No. 2331, Available at SSRN: https://ssrn.com/abstract=3491235

Alan Roncoroni (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zurich
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/roncoroni-alan

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Marco D'Errico

University of Zurich

Andreasstrasse 15
Zurich, 8050
Switzerland

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Grzegorz Hałaj

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
329
rank
400,160
PlumX Metrics