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Insolvency and contagion in the Brazilian interbank market

Author

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  • Souza, Sergio R.S.
  • Tabak, Benjamin M.
  • Silva, Thiago C.
  • Guerra, Solange M.

Abstract

This paper proposes a new way to model and analyze contagion in interbank networks. We use a unique dataset from the Brazilian financial system and include all active financial intermediaries. We show that the contagion chain has a short propagation path. We find that first-round contagion is generated only by banks and that medium-sized banks can generate contagion, which implies that size is not the sole determinant of importance within networks. Most vulnerable financial institutions are not banks. Finally, we compute a lower bound for the financial system expected losses in a 1-year horizon. The results contribute to the development of a financial stability-monitoring toolkit.

Suggested Citation

  • Souza, Sergio R.S. & Tabak, Benjamin M. & Silva, Thiago C. & Guerra, Solange M., 2015. "Insolvency and contagion in the Brazilian interbank market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 431(C), pages 140-151.
    • Handle: RePEc:eee:phsmap:v:431:y:2015:i:c:p:140-151
    DOI: 10.1016/j.physa.2015.03.005
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    14. Thiago Christiano Silva & Michel Alexandre da Silva & Benjamin Miranda Tabak, 2016. "Modeling Financial Networks: a feedback approach," Working Papers Series 438, Central Bank of Brazil, Research Department.
    15. Yao, Yanzhen & Li, Jianping & Zhu, Xiaoqian & Wei, Lu, 2017. "Expected default based score for identifying systemically important banks," Economic Modelling, Elsevier, vol. 64(C), pages 589-600.
    16. Barón, Andrea & Landaberry, María Victoria & Lluberas, Rodrigo & Ponce, Jorge, 2021. "Commercial and banking credit network in Uruguay," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(3).
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    18. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Cajueiro, Daniel Oliveira & Dias, Marina Villas Boas, 2017. "A comparison of DEA and SFA using micro- and macro-level perspectives: Efficiency of Chinese local banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 216-223.
    19. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    20. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    21. Ardekani, Aref Mahdavi & Distinguin, Isabelle & Tarazi, Amine, 2020. "Do banks change their liquidity ratios based on network characteristics?," European Journal of Operational Research, Elsevier, vol. 285(2), pages 789-803.

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