This paper examines the degree to which the failure of one bank would cause the subsequent collapse of other banks. Using unique data on interbank payment flows, the magnitude of bilateral federal funds exposures is quanti- fied. These exposures are used to simulate the impact of various failure scenarios, and the risk of contagion is found to be economically small. This paper quantifies contagion risk present in the U.S. banking system. Unlike previous studies that infer contagion indirectly by identifying common characteristics of banks that are affected by some event (e.g., third-world debt crisis, large bank failure), this study estimates contagion directly by examining data containing the complete universe of federal funds transactions across banks. Using such data allows for straightforward simulation exercises that demonstrate the degree of contagion that might arise from these exposures. The cost of this direct approach to measuring contagion is clear. The data analyzed only incorporate federal funds transactions. Because of severe data limitations, other exposures among banks cannot be examined on a bilateral basis. As a result of this, an obvious criticism of the results that follow is that other exposures may actually be much higher or may be distributed in a particularly contagion-enhancing way. While it will be argued that the federal funds exposures used in this paper make up a substantial fraction of unsecured interbank credit exposures, one must realize that the conclusions reached are conditional on the set of exposures being ex- amined. That is, the estimates of contagion reported here are accurate, yet poten- tially conservative. Despite this caveat, the approach employed in this paper to measure contagion has at least three important advantages. First and foremost, the data measure expo- sures bilaterally. That is, each bank's exposure to every other bank is known. This The views expressed are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve system. The author appreciates the helpful comments of Allen Berger (the editor) and two anonymous referees. Craig H. Furfine is an Economic Advisor, Federal Reserve Bank of Chicago. E-mail: