IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v71y2024ics1572308924000196.html
   My bibliography  Save this article

Shock amplification in an interconnected financial system of banks and investment funds

Author

Listed:
  • Sydow, Matthias
  • Schilte, Aurore
  • Covi, Giovanni
  • Deipenbrock, Marija
  • Del Vecchio, Leonardo
  • Fiedor, Pawel
  • Fukker, Gábor
  • Gehrend, Max
  • Gourdel, Régis
  • Grassi, Alberto
  • Hilberg, Björn
  • Kaijser, Michiel
  • Kaoudis, Georgios
  • Mingarelli, Luca
  • Montagna, Mattia
  • Piquard, Thibaut
  • Salakhova, Dilyara
  • Tente, Natalia

Abstract

This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point. The main driver of additional bank losses are endogenous market losses generated by investment funds’ asset liquidation.

Suggested Citation

  • Sydow, Matthias & Schilte, Aurore & Covi, Giovanni & Deipenbrock, Marija & Del Vecchio, Leonardo & Fiedor, Pawel & Fukker, Gábor & Gehrend, Max & Gourdel, Régis & Grassi, Alberto & Hilberg, Björn & Ka, 2024. "Shock amplification in an interconnected financial system of banks and investment funds," Journal of Financial Stability, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finsta:v:71:y:2024:i:c:s1572308924000196
    DOI: 10.1016/j.jfs.2024.101234
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308924000196
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfs.2024.101234?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Fire sales; Liquidity; Overlapping portfolios; Price impact; Stress testing;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:71:y:2024:i:c:s1572308924000196. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.