Giovanni Covi, Mattia Montagna and Gabriele Torri
Systemic risk in the bank sector is often associated with long periods of economic downturn and large social costs. In a new paper, we develop a microstructural contagion model to disentangle and quantify the different sources of systemic risk for the euro-area banking system. Calibrated to granular euro-area data, we estimate that the probability of a systemic banking crisis was around 3.6% in 2018. Seventy per cent of the risk stems from economic risks, with fire sales and contagion risk accounting for most of the remainder and only a small role for interbank exposures. Our findings suggest that correlations among banks’ losses play a crucial role in the origins of systemic risk.
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