INTERBANK LINKAGES AND CONTAGION RISK IN THE PORTUGUESE BANKING SYSTEM

Interbank money markets can be a channel through which problems in one institution can spread to the remaining ones. We characterize the Portuguese overnight interbank money market between 1999 and 2009 and analyze its inherent potential for contagion, based on bilateral interbank exposures. We conclude that: (i) the Portuguese overnight interbank money market has a multiple money center structure; (ii) although unlikely, the failure of one institution can have contagion effects, pushing others into failure; (iii) however, even under the most extreme assumptions, banks that fail by contagion represent less than 10% of the total banking systems assets.