Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System

TILEC Discussion Paper No. 2006-016

36 Pages Posted: 13 Jul 2006

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Gregory Nguyen

National Bank of Belgium - Research Department

Abstract

Robust (cross-border) interbank markets are important for the well functioning of modern financial systems. Yet, a network of interbank exposures may lead to domino effects following the event of an initial bank failure. We investigate the evolution and determinants of contagion risk for the Belgian banking system over the period 1993-2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposures, and cross-border interbank exposures. The structure of the interbank market affects contagion risk. We find that a change from a complete structure (where all banks have symmetric links) towards a "multiple money centre" structure (where money centres are symmetrically linked to otherwise disconnected banks) has decreased the risk and impact of contagion. In addition, an increase in the relative importance of cross-border interbank exposures has lowered local contagion risk. Yet, this reduction may have been compensated by an increase in contagion risk stemming from foreign banks.

Keywords: Interbank markets, financial stability, financial integration, contagion

JEL Classification: G20, G15

Suggested Citation

Degryse, Hans and Nguyen, Gregory, Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System. TILEC Discussion Paper No. 2006-016. Available at SSRN: https://ssrn.com/abstract=913691

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gregory Nguyen

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

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