Research Discussion Papers, Bank of Finland
No 6/2009:
Financial interlinkages and risk of contagion in the Finnish interbank market
Mervi Toivanen ()
Abstract: Using the maximum entropy method, this paper estimates the
danger of contagion in the Finnish interbank market in 2005–2007 as well as
the existence of contagion during a Finnish banking crisis. The contagion
analysis of the early 1990s is able to predict the most troublesome and
defaulting banks in the banking sector. The simulation results for
2005–2007 suggest that five of ten deposit banks are possible starting
points for contagious effects. The magnitude of contagion is conditional on
the first failing bank. In addition to large commercial banks, middle-sized
banks also cause damaging domino effects. Over the last few years, the
negative effects of contagion on the Finnish banking sector have been, on
average, more limited than those of the early 1990s. The contagion is
currently a low probability event in the Finnish interbank market.
Keywords: contagion; interbank markets; Finland; maximum entropy; (follow links to similar papers)
JEL-Codes: G01; G21; (follow links to similar papers)
33 pages, January 28, 2009
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