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Financial interlinkages and risk of contagion in the Finnish interbank market

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  • Toivanen, Mervi

Abstract

Using the maximum entropy method, this paper estimates the danger of contagion in the Finnish interbank market in 2005 2007 as well as the existence of contagion during a Finnish banking crisis. The contagion analysis of the early 1990s is able to predict the most troublesome and defaulting banks in the banking sector. The simulation results for 2005 2007 suggest that five of ten deposit banks are possible starting points for contagious effects. The magnitude of contagion is conditional on the first failing bank. In addition to large commercial banks, middle-sized banks also cause damaging domino effects. Over the last few years, the negative effects of contagion on the Finnish banking sector have been, on average, more limited than those of the early 1990s. The contagion is currently a low probability event in the Finnish interbank market.

Suggested Citation

  • Toivanen, Mervi, 2009. "Financial interlinkages and risk of contagion in the Finnish interbank market," Bank of Finland Research Discussion Papers 6/2009, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2009_006
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    References listed on IDEAS

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    1. Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
    2. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
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    7. Hans Degryse & Grégory Nguyen, 2007. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 123-171, June.
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    Cited by:

    1. Shuwen Gong & Huiwen Zou, 2023. "Simulation of interactive contagion between depositors' panic and banking risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 392-404, January.
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    3. Toivanen, Mervi, 2013. "Contagion in the interbank network: An epidemiological approach," Bank of Finland Research Discussion Papers 19/2013, Bank of Finland.

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