Journal of Financial Services Research

, Volume 29, Issue 1, pp 37–60 | Cite as

Interbank Credit Lines as a Channel of Contagion

  • Jeannette MüllerEmail author


This paper assesses the potential for contagion in the Swiss interbank market using new data on bilateral bank exposures as well as on credit lines. A simulation approach is applied to assess the banking system's inherent instability. Moreover, the spill-over effects of a simulated default situation in the interbank market on the liquidity and solvency of banks are measured. The main findings are, first, that there is a substantial potential for contagion. Second, the exposure as well as the credit line contagion channel are relevant for Switzerland. Third, a lender of last resort intervention could reduce spill-over effects remarkably. Finally, the structure of the interbank market has considerable impact on its resilience against spill-over effects: Centralized markets are more prone to contagion than homogenous ones.

Key words

Financial contagion systemic risk network structures lender of last resort Switzerland 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Allen, Franklin, and Douglas Gale. “Financial Contagion.” Journal of Political Economy 108 (February 2000), 1–33.CrossRefGoogle Scholar
  2. Cifuentes, Rodrigo, Gianluigi Ferrucci, and Hyun Song Shin. “Liquidity Risk and Contagion.” Mimeo, 2004.Google Scholar
  3. De Bandt, Olivier, and Philipp Hartmann. “Systemic Risk: A Survey.” European Central Bank Working Paper, No. 35, November 2000.Google Scholar
  4. Diamond, Douglas, and Philip H. Dybvig. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91 (June 1983), 401–419.Google Scholar
  5. Eisenberg, Larry, and Thomas H. Noe. “Systemic Risk in Financial Systems.” Management Science 47 (February 2001), 236–249.CrossRefGoogle Scholar
  6. Elsinger, Helmut, Alfred Lehar and Martin Summer. “A New Approach to Assessing the Risk of Interbank Loans.” Financial Stability Report 3, Oesterreichische Nationalbank, 2002.Google Scholar
  7. Faust, Katherine, and Stanley Wasserman. Social Network Analysis: Methods and Applications. Cambridge University Press, 1994.Google Scholar
  8. Freixas, Xavier, Bruno Parigi, and Jean-Charles Rochet. “Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank.” Journal of Money, Credit, and Banking 32 (August 2000), 611–638.Google Scholar
  9. Furfine, Craig. “The Interbank Market During a Crisis.” BIS Working Papers, No. 99, June 2001.Google Scholar
  10. Holmström, Bengt, and Jean Tirole. “Private and Public Supply of Liquidity.” Journal of Political Economy 106 (February 1998), 1–40.Google Scholar
  11. Kaufman, George G. “Bank Contagion: A Review of the Theory and Evidence.” Journal of Financial Services Research 8 (April 1994), 123–150.CrossRefGoogle Scholar
  12. Maurer, Martin, and George Sheldon. “Interbank Lending and Systemic Risk: An empirical Analysis for Switzerland.” Swiss Journal of Economics and Statistics 134 (December 1998), 685–704.Google Scholar
  13. Müller, Jeannette. “The Interbank Market as a Network—a Graph-theoretical Approach.” Mimeo, 2003.Google Scholar
  14. Nguyen, Grégory. “The Belgian Interbank Market: Interbank Linkages and Systemic Risk.” National Bank of Belgium Financial Stability Review 2 (2003), 105–123.Google Scholar
  15. Rochet, Jean-Charles, and Jean Tirole. “Interbank Lending and Systemic Risk.” Journal of Money, Credit, and Banking 28 (February 1996), 733–762.Google Scholar
  16. Upper, Christian and Andreas Worms. “Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?” Deutsche Bundesbank Discussion Paper 09/02, February 2002.Google Scholar
  17. Watkins, John J. and Robin J. Wilson. “Graphs—An Introductory Approach.” New York: John Wiley & Sons, 1990.Google Scholar
  18. Wells, Simon. “UK Interbank Exposures: Systemic Risk Implications.” Bank of England Financial Stability Review 13 (December 2002), 175–182.Google Scholar

Copyright information

© Springer Science + Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Swiss National BankZürichSwitzerland

Personalised recommendations