Identifying Contagion in a Banking Network
Abstract: We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2017082pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2017-08-15
Pages: 36 pages