Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228209
Authors: 
Roncoroni, Alan
Battiston, Stefano
D'Errico, Marco
Hałaj, Grzegorz
Kok Sørensen, Christoffer
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2331
Abstract: 
We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union.
Subjects: 
nancial networks
systemic risk
financial contagion
financial stability
bank stress test
cross-border contagion channels
JEL: 
C45
C63
D85
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3900-3
Document Type: 
Working Paper

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