Shock amplification in an interconnected financial system of banks and investment funds

Regis Gourdel, Matthias Sydow*, Aurore Schilte, Giovanni Covi, Marija Deipenbrock, Leonardo Del Vecchio, Paweł Fiedor, Gábor Fukker, Max Gehrend, Alberto Grassi, Björn Hilberg, Michiel Kaijser, Georgios Kaoudis, Luca Mingarelli, Mattia Montagna, Thibaut Piquard, Dilyara Salakhova, Natalia Tente

*Korrespondierende*r Autor*in für diese Arbeit

Publikation: Working/Discussion PaperWorking Paper/Preprint


This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point.
HerausgeberEuropean Central Bank
ISBN (elektronisch)978-92-899-4804-3
PublikationsstatusVeröffentlicht - 2021
Extern publiziertJa


ReiheECB Working Paper Series