Working Paper Series no. 414: Bilateral Exposures and Systemic Solvency Risk

Abstract

By introducing a structure of the balance sheets of the banks, which takes into account their bilateral exposures in terms of stocks or lendings, we get a structural model for default analysis. This model allows distinguishing the exogenous and endogenous default dependence. We prove the existence and uniqueness of the liquidation equilibrium, we study the consequences of exogenous shocks on the banking system and we measure contagion phenomena. This approach is illustrated by an application to the French banking system.

Christian Gourieroux, Jean-Cyprien Heam and Alain Monfort
December 2012

Classification JEL : G21, G28, G18, G33.

Keywords : Contagion, Systemic Risk, Solvency, Clearing, Liquidation Equilibrium, Impulse Response, Value-of-the Firm Model.