Contagion in the Interbank Market with Stochastic Loss Given Default
by Christoph Memmela Angelika Sachsb, and Ingrid Steina
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.
(PDF, 47 pages 405 kb)
a Deutsche Bundesbank
b LMU Munich