Denmark: Financial Sector Assessment Program-Technical Note-Financial Sector Interconnectedness and Contagion Risk Analysis

IMF Staff Country Reports, August 12, 2020

Source details

Canonical URL: Denmark: Financial Sector Assessment Program-Technical Note-Financial Sector Interconnectedness and Contagion Risk Analysis

The FSAP developed a novel multi-layer contagion model to analyze financial system interconnectedness using a new and comprehensive database.
The infrastructure is based on securities data and newly-released confidential credit register data.
The simulation exercise consists of a series of idiosyncratic shocks, where the default of each node is triggered iteratively.
The model introduces a repricing channel on traded securities to capture cascade effects arising from market reactions to changes in an entity’s solvency condition.

Multi-layer contagion model distinguishing transmission of shocks between eight exposure types or layers:
- loans
- deposits
- reverse repos
- covered bonds
- other debt securities
- equities
- unlisted shares
- other claims
Data sources:
- securities data
- newly-released confidential credit register data

Primary focus:
- the banking system (banks and MCIs)
- interconnections through the covered bond market as cornerstones of the overall financial system
Additional included exposures:
- non-bank financial institutions (insurer, pension and investment funds)
- non-financial sectors (households, corporates)
- exposures both domestically and abroad

Iterative idiosyncratic shock framework: each node’s default is triggered iteratively to assess contagion.
Repricing channel on traded securities to capture market-driven cascade effects linked to changes in solvency.
Distinguishes transmission across multiple exposure types to capture cross-market spillovers (e.g., loans versus securities versus covered bonds).