Financial Contagion Through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis

October 1, 2010

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Thierry Tressel. Financial Contagion Through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis, (USA: International Monetary Fund, 2010) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.

Subject: Asset and liability management, Asset liquidity, Banking, Commercial banks, Emerging and frontier financial markets, Financial institutions, Financial markets, Foreign banks, Foreign currency exposure, Money

Keywords: Asset, Asset liquidity, Bank assets, Bank capital outflow, Bank level, Banks liability, Central and Eastern Europe, Commercial banks, Deleveraging, Eastern Europe, Emerging and frontier financial markets, Financial Contagion, Foreign banks, Foreign currency exposure, Funding Shocks, Global, Interbank market, Network Analysis, Parent bank, Risk exposure, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/236
Stock No:

WPIEA2010236
ISBN:

9781455209361
ISSN:

1018-5941

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