Contagion in crises

By analysing the risk of interbank contagion during two distinctive crises, namely the Finnish banking crisis in the 1990s and the most recent financial crisis of the 2000s, this paper provides evidence on negative domino effects in a small open economy with a concentrated banking system. Simulations based on interbank exposures and maximum entropy estimations shed light on the magnitude of the contagion and the vulnerability to cross-border risks.

21p 035522894 13-04-2020 17 2   Download

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The close link between the financial cycle and financial crises underlies the fourth empirical feature: it is possible to measure the build-up of risk of financial crises in real time with fairly good accuracy. Specifically, the most promising leading indicators of financial crises are based on simultaneous positive deviations (or “gaps”) of the ratio of (private sector) credit-to- GDP and asset prices, especially property prices, from historical norms (Borio and Drehmann (2009), Alessi and Detken (2009)).

36p mebachano 01-02-2013 39 3   Download

We also model the contagion process in a relatively mechanical fashion, holding balance sheets and the size and structure of interbank linkages constant as default propagates through the system. Arguably, in normal times in developed nancial systems, banks are sufciently robust that very minor variations in their default probabilities do not affect the decision of whether or not to lend to them in interbank markets.

285p mebachano 01-02-2013 45 5   Download