Systemic risk in the netting system

Abstract

Abstract In interbank clearing networks, a bank experiencing sudden liquidity or solvency problems may prevent settlement of the claims of its direct creditors, which may in turn jeopardize settlement of other institutions. The paper presents an empirical assessment of the potential size of this ‘domino effect’ in the Italian netting system. A participant's settlement failure is simulated and the impact on the rest of the system measured. On average, only about 4 percent of participants were large enough to trigger systemic crises; less than 1 percent defaulted due to systemic reasons; the average monetary loss was less than 3 percent of the daily flow of funds through the clearing system. Similar simulations by other authors for the U.S. system yielded a much larger impact of systemic risk. We argue that the difference is mainly due to the much smaller volume of funds flowing through the Italian system and to structural differences.