Quantifying the importance of different contagion channels as sources of systemic risk

Christoph Siebenbrunner

doi:10.1007/s11403-020-00286-2

Christoph Siebenbrunner

Open Access

https://doi.org/10.1007/s11403-020-00286-2

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Abstract

A framework that allows computing contagion effects from both direct exposure contagion and overlapping portfolios is presented. The effects of the latter are broken down into loss correlation, effects from fire sales and mark-to-market accounting. The impact can be quantified for any single contagion channel as well as when multiple channels are jointly active. The model can be used to compute contagion losses that are consistent with a given macroeconomic scenario and thus provides a macroprudential extension for microprudential stress tests. Empirical results for a real-world banking system suggest that contagion effects stemming from direct exposures have the highest loss contribution.

Highlights

The financial crisis which started in 2008, in particular the events following the collapse of the investment bank Lehman Brothers, has shown that interconnectivity creates risks for financial stability
While such interconnections may serve as a technique for spreading risk, they can lead to contagion effects that threaten the stability of the financial system
The goal of this paper is to provide a quantitative framework for computing systemic contagion losses in a financial system, taking into account multiple channels of

Summary

Introduction

The financial crisis which started in 2008, in particular the events following the collapse of the investment bank Lehman Brothers, has shown that interconnectivity creates risks for financial stability. In today’s highly interconnected financial systems, shocks can spread from single entities to the entire system. While such interconnections may serve as a technique for spreading risk, they can lead to contagion effects that threaten the stability of the financial system. Such contagion effects may occur via different channels. I will study the channels of direct contagion and overlapping portfolios in greater detail. The goal of this paper is to provide a quantitative framework for computing systemic contagion losses in a financial system, taking into account multiple channels of

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