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September 2012 issue
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Ehrmann, Sondermann
Beechey, Österholm
Knüppel, Schultefrankenfeld
Alpanda, Aysun
Memmel,Sachs, Stein
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Contagion in the Interbank Market with Stochastic Loss Given Default

by Christoph Memmela Angelika Sachsb, and Ingrid Steina

Abstract

This paper investigates contagion in the German interbank market under the assumption of a stochastic loss given default (LGD). We combine a unique data set about the LGD of interbank loans with detailed data about interbank exposures. We find that the frequency distribution of the LGD is markedly U-shaped. Our simulations show that contagion in the German interbank market may happen. For the point in time under consideration, the assumption of a stochastic LGD leads on average to a more fragile banking system than under the assumption of a constant LGD.

JEL Code: D53, E47, G21.

 
Full article (PDF, 47 pages 405 kb)


a Deutsche Bundesbank
b LMU Munich