September 2012 issue contents
Contagion in the Interbank Market with Stochastic Loss Given Default

by Christoph Memmel^a Angelika Sachs^b, and Ingrid Stein^a

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