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Prof. Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.

Abhandlungen über Johann Heinrich Jung-Stilling

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Contagion effects

Unless otherwise defined, the risk of systemic risk arising from the transmission of difficulties at a failing institution to other banks and to the financial market as a whole. – Direct contagion effects arise as a result of contractual relationships with insolvent institutions. They necessitate write-downs on receivables from the insolvent institution, or there is a loss of insurance coverage for credit default swaps. – Indirect contagion effects resulting from falling asset prices are triggered by panic selling. They lead to an excessive fall in prices, especially for illiquid securities. Via valuation rules close to market prices, this can be reflected in high write-downs, as occasionally happened in the financial crisis that followed the subprime crisis. – In the case of information-driven contagion effects, a withdrawal of deposits occurs when investors have the expectation that certain banks have invested in similar assets as problematic institutions. A deduction can also be triggered by the mere suspicion that the institutions in question have lending relationships with problematic parts of the financial system. – See banking hospital, fair value, financial market collapse, combination effect, collateral crisis, mark-to-model approach, market value, massive sales, monetization, procyclicality, risk, fair value, asset, incorporated, securities holdings, time value, cyclicality. – Cf. Financial Stability Report 2013, p. 29 ff: (outlining various contagion channels).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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