Borradores de Economía - Short-Term Liquidity Contagion in the Interbank Market
La serie Borradores de Economía, de la Subgerencia de Estudios Económicos del Banco de la República, contribuye a la difusión y promoción de la investigación realizada por los empleados de la institución. Esta serie se encuentra indexada en Research Papers in Economics (RePEc).
En múltiples ocasiones estos trabajos han sido el resultado de la colaboración con personas de otras instituciones nacionales o internacionales. Los trabajos son de carácter provisional, las opiniones y posibles errores son responsabilidad exclusiva del autor y sus contenidos no comprometen al Banco de la República ni a su Junta Directiva.
We implement a modified version of DebtRank, a measure of systemic impact inspired in feedback centrality, to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue, measured as the decrease in financial institutions’ short-term liquidity position across the Colombian interbank network. Concurrent with related literature, unless contagion dynamics are preceded by a major –but unlikely- drop in the short-term liquidity position of all participants, we consistently find that individual and systemic contagion effects are negligible. We find that negative effects resulting from contagion are concentrated in a few financial institutions. However, as most of their impact is conditional on the occurrence of unlikely major widespread illiquidity events, and due to the subsidiary contribution of the interbank market to the local money market, their overall systemic importance is still to be confirmed.
