Abstract - Interbank Contagion: Evidence from Real Transactions

This paper tests financial contagion due to interbank linkages. For identifcation we exploit an idiosyncratic and to a large extent exogenous shock caused by a large-bank failure in conjunction with precise data on interbank linkages. We find that banks with higher level of interbank exposure to the failed bank suffer higher probability of large deposit withdrawals and experience lower average deposit growth. In addition, we find that the impact of exposure on deposit withdrawals is higher for banks with weaker fundamentals. To further push on causality, we use overall lending in the interbank market (excluding lending to the failed bank) as an instrument of interbank exposure to the failed bank. Our evidence suggests that interbank exposure to the failed bank transmits the shock (contagion) to other banks and that there is depositor disciplining in the process of contagion.

Jose Luis Peydro-Alcalde
24.Apr 2007

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