Modelling Fire Sale Contagion Across Banks and Non-banks

37 Pages Posted: 21 Jul 2020 Last revised: 2 Mar 2021

See all articles by Fabio Caccioli

Fabio Caccioli

University College London

Gerardo Ferrara

Bank of England

Amanah Ramadiah

Financial Network Analytics Ltd

Date Written: July 3, 2020


We study the impact of common asset holdings across different financial sectors on financial stability. In particular, we model indirect contagion via fire sales across UK banks and non-banks. Fire sales are triggered by different responses to a financial shock: banks and non unit-linked insurers are subject to regulatory constraints, while funds and unit-linked insurers are obliged to meet investor redemptions. We use our model to conduct a systemic stress simulation under different initial shock scenarios and institutions’ selling strategies. We find that performing a stress simulation that does not account for common asset holdings across multiple sectors can severely underestimate the fire sale losses in the financial system.We also show that a pro-rata liquidation strategy would result in a higher level of fire sale losses, but a waterfall strategy may produce a higher spill over effect for a passive institution (or a passive sector) that chooses not to liquidate any of its assets during distress.

Keywords: Common asset holdings, fire sales, financial contagion, systemic risk

JEL Classification: G20, G21, G22, G23

Suggested Citation

Caccioli, Fabio and Ferrara, Gerardo and Ramadiah, Amanah, Modelling Fire Sale Contagion Across Banks and Non-banks (July 3, 2020). Bank of England Working Paper No. 878, Available at SSRN: or

Fabio Caccioli

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Gerardo Ferrara (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Amanah Ramadiah

Financial Network Analytics Ltd ( email )

United Kingdom

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