Interconnected Banks and Systemically Important Exposures. Roncoroni, A., Battiston, S., D'Errico, M., Halaj, G., Kok, C., Halaj, G., & Kok, C. Paper-Progress, 2018.
Interconnected Banks and Systemically Important Exposures [pdf]Website  abstract   bibtex   
We develop a new methodology that accounts for bank's portfolio overlap across countries and sectors in order to assess, in monetary terms, the systemic importance of real-economy sectors throughout the banking system. We apply the methodology to a unique, supervisory dataset collected by the European Central Bank and covering 26 large banks in the euro area along with their exposures both to real economy sectors and to other financial institutions across the financial instruments of loans, bonds and equity holdings. We analyze the contagion channels across different dimensions (geographical and sectoral shock origination, shock size, interbank recovery rate, market volatility, and time) and provide policy insights on the potential impact of more diversified or domestic portfolio allocation strategies. We find that banks' exposures towards the real economy are typically domestic, while exposures towards the financial sector are typically global. We also quantify directly and indirectly the monetary impact of exogenous shocks according to a generalized contagion model, which accounts for varying levels of recovery rate and uncertainty on the values of obligation with maturity in the future. In particular, we identify a strongly non-linear relationship between diversification of exposures, shock size and losses due to interbank contagion. Finally, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network, respectively.

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