Shock amplification in an interconnected financial system of banks and investment funds

Arbeitspapier

This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks' capital ratios by around one percentage point.

Object Details

• ISBN: 978-92-899-4804-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2581

Classification and Topics

• Classification: Wirtschaft ; Network Formation and Analysis: Theory ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: Fire sales ; liquidity ; overlapping portfolios ; price impact ; stress testing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sydow, Matthias ; Schilte, Aurore ; Covi, Giovanni ; Deipenbrock, Marija ; Del Vecchio, Leonardo ; Fiedor, Pawe± ; Fukker, Gábor ; Gehrend, Max ; Gourdel, Régis ; Grassi, Alberto ; Hilberg, Björn ; Kaijser, Michiel ; Kaoudis, Georgios ; Mingarelli, Luca ; Montagna, Mattia ; Piquard, Thibaut ; Salakhova, Dilyara ; Tente, Natalia
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2021

Further information

• DOI: doi:10.2866/68326
• Handle: http://hdl.handle.net/10419/237720
• Last update: 10.03.2025, 11:44 AM CET