Transmission channels of systemic risk and contagion in the European financial network

Nikos Paltalidis, Dimitrios Gounopoulos, Renatas Kizys, Yiannis Koutelidakis

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Abstract

We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.
Original languageEnglish
Pages (from-to)S36–S52
JournalJournal of Banking & Finance
Volume61
Issue numberSupplement 1
Early online date28 Apr 2015
DOIs
Publication statusPublished - 1 Dec 2015

Keywords

  • Systemic Risk
  • Maximum Entropy
  • Interbank Market
  • Financial Network
  • Sovereign Credit Risks
  • European Banks

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