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Jean-Cyprien Héam

16 September 2013
Financial institutions are connected to each other by a series of bilateral transactions. In normal times, institutions’ connections may result in efficient risk transfer. But in crises, connections can facilitate contagion – as initial problems lead to chains of defaults and liquidity shortages – sparked by shocks which might arise within the financial system or from the real economy. Institutions are also interconnected in indirect ways, since they are exposed to common risk factors that can result in concurrent losses. For example, most banks extend loans secured by real estate: they are thus collectively exposed to falls in house prices. Resulting bank distress can then exacerbate initial problems: banks might simultaneously sell collateral (houses), thus worsening downward price spirals. Less tangibly, institutions can also be connected through perceptions of counterparties’ creditworthiness. Given uncertainty, financial institutions may in general become reluctant to lend to each other and hoard liquidity. Potential for contagion due to interconnectedness is a key component of systemic risk. As a first step towards understanding the mechanisms of contagion, this paper abstracts from complex indirect connections between banks, and rather focuses on direct linkages between 53 large EU banks, based on unique data on interbank exposures collected by national regulators as of the end of 2011.
JEL Code
G01 : Financial Economics→General→Financial Crises
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
13 July 2015
This paper contains an analysis of the network of the 29 largest European insurance groups and their financial counterparties. Insurance companies have direct exposures to other insurers, banks and other financial institutions through the holdings of debt, equity and other financial instruments. These exposures can cause direct contagion and thereby the spread of systemic risks. This analysis focuses on direct linkages between EU insurers and banks. Sectoral data show that at least 20% of insurers’ assets are investments in banks. As a result insurers are an important source of funding for banks. This paper adds to the expanding research on financial market networks and on systemic risks in the insurance sector.
JEL Code
L14 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Transactional Relationships, Contracts and Reputation, Networks
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation