Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/122192
Authors: 
Fink, Kilian
Krüger, Ulrich
Meller, Barbara
Wong, Lui-Hsian
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 38/2015
Abstract: 
We propose an algorithm to model contagion in the interbank market via what we term the credit quality channel. In existing models on contagion via interbank credit, external shocks to banks often spread to other banks only in case of a default. In contrast, shocks are transmitted via asset devaluations and deteriorations in the credit quality in our algorithm: First, the probability of default (PD) of those banks directly affected by some shock increases. This increases the expected loss of the credit portfolios of the initially affected banks' counterparties, thereby reducing the counterparties' regulatory capital ratio. From a logistic regression, we estimate the increase in the counterparties' PD due to a reduced capital ratio. Their increased PDs in turn affect the counterparties' counterparties, and so on. This coherent and flexible framework is applied to bilateral interbank credit exposure of the entire German banking system in order to examine policy questions. For that purpose, we propose to measure the potential cost of contagion of a given shock scenario by the aggregated regulatory capital loss computed in our algorithm.
Subjects: 
contagion
systemic risk
macroprudential policy
policy evaluation
interconnectedness
JEL: 
C63
G01
G17
G21
G28
ISBN: 
978-3-95729-202-5
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.