OFRwp0009_GlassermanYoung_HowLikelyContagionFinancialNetworks

The banks are listed by asset size in table 1 and

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Unformatted text preview: [38] Upper, C., and Worms, A. (2002). Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion? Discussion Paper 09, Deutsche Bundesbank. [39] Vuillemey, G., and Peltonen, T.A. (2013) Sovereign Credit Events and Their Spillovers to the European Banking System — The Interplay Between Sovereign Bonds and CDS Holdings. Working paper, European Central Bank. [40] Wirch, J.L. (1999) Coherent Beta Risk Measures for Capital Requirements. Dissertation, Department of Statistics and Actuarial Sciences, University of Waterloo, Waterloo, Ontario, Canada. [41] Yellen, J. (2013) Interconnectedness and Systemic Risk: Lessons from the Financial Crisis and Policy Implications. Board of Governors of the Federal Reserve System, Washington, D.C. 31 Appendix: Application to European Banks To provide some insight into how our theoretical results apply in practice, we draw on data from banks that participated in the European Banking Authority’s (EBA) 2011 stress test. Detailed information on interbank exposures needed to calibrate a full network model is not publicly available. But our results do not depend on detailed network structure, so the information disclosed with the results of the stress test give us most of what we need. Ninety banks in 21 countries participated in the stress test. For each, the EBA reports total assets and equity values as of the end of 2010. In addition, the EBA reports each bank’s total exposure at default (EAD) to other financial institutions. The EAD measures a bank’s total claims on all other banks, so we take this as the size of each bank’s in-network assets. Subtracting this value from total assets gives us ci , the size of the bank’s outside assets. For wi we use the equity values reported by the EBA, which then allows us to calculate λi = ci /wi . The only remaining parameter we need is βi , the fraction of a bank’s liabilities owed to other banks. This information is not included in the EBA summary, nor is it consistently reported by banks in their financial statements. As a rough indication, we assume that each bank’s in-network liabilities equal its in-network assets (though we will see that our results are fairly robust to this assumption).14 This gives us βi = EAD/(assets-equity). Some of the smallest banks have problematic data, so as a simple rule we omit the ten smallest. We also omit any countries with only a single participating bank. This leaves us with 76 banks, of which the 50 largest are included in Table 1. For all 76 banks, Table 2 includes assets, EAD, and equity as reported by the EBA (in millions of euros), and our derived values for ci , wi , βi , λi . The banks are listed by asset size in Table 1 and grouped by country in Table 2. In Table 1, we examine the potential for contagion from the failure of each of the five largest banks, BNP Paribas, Deutsche Bank, HSBC, Barclays, and Credit Agricole. Taking each of these in turn as the triggering bank, we th...
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