Short-Term Liquidity Contagion in the Interbank Market

In: Cuadernos de economía: publicación del Departamento de Teoría y Política Económica, Facultad de Ciencias Económicas, Universidad Nacional de Colombia, Band 38, Heft 76, S. 51-80

Abstract

We implement a modified version of DebtRank 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. We find that contagion negative effects 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.