Contagion accounting

Arbeitspapier

We provide a simple and tractable accounting-based stress-testing framework to assess loss dynamics in the banking sector, in a context of leverage targeting. Contagion can occur through direct interbank exposures, and indirect exposures due to overlapping portfolios with the associated price dynamics via fire sales. We apply the framework to three granular proprietary ECB datasets, including an interbank network of 26 large euro area banks as well as their overlapping portfolios of loans, derivatives and securities. A 5 percent shock to the price of assets held in the trading book leads to an initial loss of 30 percent of system equity and an additional loss of 1.3 percent due to fire sales spillovers. Direct interbank contagion is negligible in our analysis. Our findings underscore the importance of accurately estimating the price effects of fire sales.

Object Details

• ISBN: 978-92-899-4445-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2499

Classification and Topics

• Classification: Wirtschaft ; Computational Techniques; Simulation Modeling ; Financial Crises ; General Financial Markets: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Interbank networks ; contagion ; overlapping portfolios ; fire sales ; stress-testing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Aldasoro, Iñaki ; Hüser, Anne-Caroline ; Kok Sørensen, Christoffer
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2020

Further information

• DOI: doi:10.2866/216332
• Handle: http://hdl.handle.net/10419/229113
• Last update: 10.03.2025, 11:44 AM CET