Interbank Exposures: Quantifying the Risk of Contagion

Interbank Exposures:Quantifying the Risk of Contagion Craig H. Furfine (bio) Abstract This paper examines the degree to which the failure of one bank would cause the subsequent collapse of other banks. Using unique data on interbank payment flows, the magnitude of bilateral federal funds exposures is quantified. These exposures are used to simulate the impact of various failure scenarios, and the risk of contagion is found to be economically small. This paper quantifies contagion risk present in the U.S. banking system. Unlike previous studies that infer contagion indirectly by identifying common characteristics of banks that are affected by some event (e.g., third-world debt crisis, large bank failure), this…