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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
Article

Abstract

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 

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Copyright information

© Springer Science + Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Swiss National BankZürichSwitzerland

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