Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/237720
Authors: 
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
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2581
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
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.
Subjects: 
Fire sales
liquidity
overlapping portfolios
price impact
stress testing
JEL: 
D85
G01
G21
G23
L14
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4804-3
Document Type: 
Working Paper

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