Transmission channels of systemic risk and contagion in the European financial network

Gounopoulos, Dimitrios, Palalidis, Nikolaos, Kizys, Renatas and Koutelidakis, Yiannis (2015) Transmission channels of systemic risk and contagion in the European financial network. Journal of Banking & Finance. ISSN 0378-4266

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We investigate systemic risk and how financial contagion propagates within the euro area banking system by employing the Maximum Entropy method. The study captures multiple snapshots of a dynamic financial network and uses counterfactual simulations to propagate shocks emerging from three sources of systemic risk: interbank, asset price, and sovereign credit risk markets. As conditions deteriorate, these channels trigger severe direct and indirect losses and cascades of defaults, whilst the dominance of the sovereign credit risk channel amplifies, as the primary source of financial contagion in the banking network. Systemic risk within the northern euro area banking system is less apparent, while the southern euro area banking system is more prone and susceptible to bank failures provoked by financial contagion. By modelling the contagion path the results demonstrate that the euro area banking system insists to be markedly vulnerable and conducive to systemic risks.

Item Type: Article
Additional Information: JEL Classification G21, D85, G01, F37, G28
Keywords: Systemic Risk, Maximum Entropy, Interbank Market, Financial Network, Sovereign Credit Risk, European Banks.
Schools and Departments: School of Business, Management and Economics > Business and Management
Depositing User: Dimitrios Gounopoulos
Date Deposited: 12 Mar 2015 17:21
Last Modified: 06 Mar 2017 02:37

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