liquidation equilibrium with seniority and hidden cdo the aim of our paper is to price credit derivatives written on a single name when this name is a bank indeed due to the special structure of the balance sheet of a bank and to the interconnections with other institutions of the financial system the standard pricing formulas do not apply and their use can imply severe mispricing the pricing of credit derivatives written on a single bank name requires a joint analysis of the risks of all banks directly or indirectly interconnected with the bank of interest each name cannot be priced in isolation but the banking system must be treated as a whole it is necessary to analyze the contagion of losses among banks especially the equilibrium of joint defaults and recovery rates at liquidation time we show the existence and uniqueness of such an equilibrium then the standard pricing formulas are modified by adding a premium to capture the contagion effects

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

systemic risk contributions a credit portfolio approach we put forward a merton type multi factor portfolio model for assessing banks contributions to systemic risk this model accounts for the major drivers of banks systemic relevance size default risk and correlation of banks assets as a proxy for interconnectedness we measure systemic risk in terms of the portfolio expected shortfall es banks marginal risk contributions are calculated based on partial derivatives of the es in order to ensure a full risk allocation among institutions we compare the performance of an importance sampling algorithm with a fast analytical approximation of the es and the marginal risk contributions furthermore we show empirically for a portfolio of large international banks how our approach could be implemented to compute bank specic capital surcharges for systemic risk or stabilisation fees we nd that size alone is not a reliable proxy for the systemic importance of a bank in this framework in order to smooth cyclical uctuations of the risk measure we explore a time varying condence level of the es

interbank networks in prewar japan structure and implications forthcoming as interbank networks in prewar japan structure and implications with michiru sawada industrial and corporate change 2011

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

changing one s mind when the facts change incentives of experts and the design of reporting protocols experts often collect and report information over time what reporting protocol elicits the most information here a principal receives reports sequentially from an agent with privately known ability who observes two signals about the state of the world the signals differ in initial quality and unlike previous work differ in quality improvement the paper finds that mind changes inconsistent reports can signal talent if a smart agent improves faster also sequential reports dominate when the principal s decision is very sensitive to information a single report dominates if the mediocre agent s signals improve faster or the agent is likely mediocre

a critical review of contagion risk in banking the recent financial crisis has focused the attention of scholars and policymakers on how to improve financial stability through better macro prudential regulation and supervision in this paper we compare the existing theoretical and empirical literature on contagion through the banking system it is argued that the structure of the interbank market the size of banks the linkages among them the level of correlation of their investments and the transparency of the regulator are key factors in determining the possibility of contagion we discuss the different findings and present avenues for future research

correlated risks vs contagion in stochastic transition models abstract this paper studies the problem of disentangling risk correlation and contagion in a set of individual binary processes the two admissible values correspond to bad and good risk states of an individual the risk correlation is captured by introducing a dynamic frailty whereas the contagion passes through the effect of the lagged number of individuals in the bad risk state we study carefully the dynamic properties of the joint process then we focus on the limiting case of large populations portfolios the difficulty to identify risk correlation and contagion in finite samples is illustrated by means of monte carlo simulations

contagion and risk sharing on the inter bank market abstract increasing inter bank lending has an ambiguous impact on financial stability using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter bank lending promotes stability through risk sharing or provides a channel through which failures may spread in response to large economy wide shocks more inter bank lending relationships worsen systemic events for smaller shocks the opposite effect is observed as such no inter bank market structure maximizes stability under all conditions in contrast deposit insurance costs are always reduced under greater numbers of inter bank lending relationships a range of regulations are considered to increase system stability

assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction abstract monitoring and assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency for this reason systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders in this paper we consider systemic risk due to fire sales spillovers and portfolio rebalancing by using the risk metrics defined by greenwood et al 2015 by using a method based on the constrained minimization of the cross entropy we show that it is possible to assess aggregated and single bank s systemicness and vulnerability using only the information on the size of each bank and the capitalization of each investment asset we also compare our approach with an alternative widespread application of the maximum entropy principle allowing to derive graph probability distributions and generating scenarios and we use it to propose a statistical test for a change in banks vulnerability to systemic events

using regional variation in wages to measure the effects of the federal minimum wage the imposition of a national minimum wage standard provides a natural experiment in which the treatment effect varies across states depending on the fraction of workers initially earning less than the new minimum the author exploits this fact to evaluate the effect of the april 1990 increase in the federal minimum wage on teenagers wages employment and school enrollment comparisons of grouped and individual state data confirm that the rise in the minimum wage increased teenagers wages there is no evidence of corresponding losses in teenage employment or changes in teenage school enrollment

dynamical macroprudential stress testing using network theory the increasing frequency and scope of nancial crises have made global nancial stability one of the major concerns of economic policy and decision makers this has led to the understanding that nancial and banking supervision has to be thought of as a systemic task focusing on the interdependent relations among the institutions using network theory we develop a dynamic model that uses a bipartite network of banks and their assets to analyze the system s sensitivity to external shocks in individual asset classes and to evaluate the presence of features underlying the system that could lead to contagion as a case study we apply the model to stress test the venezuelan banking system from 1998 to 2013 the introduced model was able to capture monthly changes in the structure of the system and the sensitivity of bank portfolios to dierent external shock scenarios and to identify systemic vulnerabilities and their time evolution the model provides new tools for policy makers and supervision agencies to use for macroprudential dynamical stress testing

contagion risk in the australian banking and property sectors abstract the australian banking system emerged from the global crisis virtually unhurt with most banks still profitable adequately capitalized and with aa credit ratings are there any risks or vulnerabilities in this success story this paper analyzes australia s systemic banking risk and attempts to determine if this risk increased with the recent global crisis and whether this risk is related to the downturn experienced in the real estate market we use extreme value theory to measure banks and property firms univariate value at risk as well as multivariate intra sector and inter sector contagion risks of the 13 sectors analyzed we find that the property sector exhibits the highest level of extremal dependence with the banking sector the credit crisis significantly increased the probability of a bank or property firm crashing moreover contagion risks significantly increased not only within the banking and property sectors but also between those sectors

estimating bilateral exposures in the german interbank market is there a danger of contagion abstract credit risk associated with interbank lending may lead to domino effects where the failure of one bank results in the failure of other banks not directly affected by the initial shock recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages we use balance sheet information to estimate a matrix of bilateral credit relationships for the german banking system and test whether the breakdown of a single bank can lead to contagion we find that in the absence of a safety net there is considerable scope for contagion that could affect a large proportion of the banking system the financial safety net in this case institutional guarantees for saving banks and cooperative banks considerably reduces but does not eliminate the danger of contagion even so the failure of a single bank could lead to the breakdown of up to 15 of the banking system in terms of assets

tail risk and systemic risk of us and eurozone financial institutions in the wake of the global financial crisis we evaluate multiple market based measures for us and eurozone individual bank tail risk and bank systemic risk we apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions financial distress as well as individual banks exposure to each other spillover risk and to global shocks extreme systematic risk the estimation procedure presupposes that bank equity returns are heavy tailed and tail dependent as identifying assumption using both us and eurozone banks allows one to make a cross atlantic comparison of tail risks and systemic stability we also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis the results suggest that both tail risk and systemic risk in the us are higher than in the eurozone regardless of the considered sample period

systemic risk in banking networks advantages of tiered banking systems abstract this paper studies the risk and potential impact of system wide defaults in a tiered banking network where a small group of head institutions has many credit linkages with other banks while the majority of banks have only a few links a network is random and displays a given distribution of the number of banks linkages known as degree we model tiering by a negative correlation between degrees of neighboring banks and by a scale free degree distribution the main findings of the paper highlight the advantages of tiering both the risk of systemic crisis and the potential scope of the crisis are lower in systems with negative correlation of bank degrees than in other types of systems similarly in scale free networks the resilience of the system to shocks is increasing with the level of tiering

an empirical study of the mexican banking system s network and its implications for systemic risk abstract with the aim to measure and monitor systemic risk we present some topological metrics for the interbank exposures and the payments system networks the evolution of such networks is analyzed we draw important conclusions from the systemic risk s perspective and propose a measure of interconnectedness additionally we suggest non topological measures to describe individual behavior of banks in both networks the main findings of this paper are the structures of the payments and exposures networks are different in terms of connectivity the topology of the exposures network changed after the collapse of lehman brothers whereas the structure of the payments network does not the proposed measure of interconnectedness can be used to determine the importance of a bank in terms of connectivity finally we found that interconnectedness of a bank is not necessarily related with its assets size but it is linked to the contagion it might cause

stability of the world trade web over time an extinction analysis abstract the world trade web wtw is a weighted network whose nodes correspond to countries while edge weights reflecting the value of imports and or exports between countries in this paper we introduce to this macroeconomic system the notion of extinction analysis a technique often used in the analysis of ecosystems for the purpose of investigating the robustness of this network in particular we subject the wtw to a principled set of in silico knockout experiments akin to those carried out in the investigation of food webs but suitably adapted to this macroeconomic network informed by results in network theory as well as studies of contagion in economic networks we seek to understand the role of connectance in the robustness of the system we interpret increasing connectance as one aspect of a move towards globalization and liberalized trade policy broadly our experiments confirm two conjectures first that the wtws are robust yet fragile networks robust to random failures but fragile under targeted attack second that growing connectance has both positive and negative impacts on robustness more specifically we find that increasing connectance corresponds to increasing robustness for small shocks but to decreasing robustness in the face of large cascading shocks up to the system this yields evidence in support of the view that globalization as witnessed by increasing connectance increases the ability of a system to absorb shock up until a certain size whereupon the shock overwhelms the system and sparks a broader contagion we anticipate that experiments and measures like these can play an important role in the evaluation of the stability of economic systems

the price of liquidity the effects of market conditions and bank characteristics we study the prices that individual banks pay for liquidity captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap as a function of market conditions and bank characteristics these prices depend in particular on the distribution of liquidity across banks which is calculated over time using individual bank level data on reserve requirements and actual holdings banks pay more for liquidity when positions are more imbalanced across banks consistent with the existence of short squeezing we also show that small banks pay more for liquidity and are more vulnerable to squeezes healthier banks pay less but contrary to what one might expect banks in formal liquidity networks do not state guarantees reduce the price of liquidity but do not protect against squeezes

bilateral exposures and systemic solvency risk en utilisant une structure des etats financiers des banques qui tient compte de leurs expositions bilaterales en termes d actions et de prets on developpe un modele structurel de faillite ce modele permet de distinguer les facteurs exogenes et endogenes dont depend la faillite on prouve l existence et l unicite de l equilibre de liquidation on etudie les consequences des chocs exogenes sur le systeme bancaire et on mesure le phenomene de contagion on illustre l usage de cette approche en l appliquant au systeme bancaire francais

overlapping portfolios contagion and financial stability abstract we study the problem of interacting channels of contagion in financial networks the first channel of contagion is counterparty failure risk this is captured empirically using data for the austrian interbank network the second channel of contagion is overlapping portfolio exposures this is studied using a stylized model we perform stress tests according to different protocols for the parameters we study neither channel of contagion results in large effects on its own in contrast when both channels are active at once bankruptcies are much more common and have large systemic effects

bank regulation and macroeconomic fluctuations over the last two decades macroeconomic cycles were frequently associated with boom bust cycles in bank lending and asset prices often followed by financial instability in this paper we argue that i the new pattern of macroeconomic cycles is partly the result of banking sector liberalization since the early mid 1970s which has increased the procyclicality of the financial system ii the regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical and may therefore amplify business cycle fluctuations iii the new basel 11 accord may considerably accentuate the procyclicality of the regulatory system

contagious bank failures in a free banking system this paper develops a model of an unregulated banking system based around a private clearing house arrangement whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage

the eurosystem money market auctions a banking perspective abstract this paper analyzes the individual bidding behavior of german banks in the money market auctions conducted by the ecb from the beginning of 2000 iiiq to the end of 2001 iq our approach takes a variety of characteristics of the individual banks into account particularly variables that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks it turns out that these characteristics are reflected in banks bidding behavior thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sector

the effect of the interbank network structure on contagion and common shocks abstract this paper proposes a dynamic multi agent model of a banking system with central bank banks optimize a portfolio of risky investments and riskless excess reserves according to their risk return and liquidity preferences they are linked via interbank loans and face stochastic deposit supply comparing different interbank network structures it is shown that money centre networks are more stable than random networks evidence is provided that the central bank stabilizes interbank markets in the short run only systemic risk via contagion is compared with common shocks and it is shown that both forms of systemic risk require different optimal policy responses

liaisons dangereuses increasing connectivity risk sharing and systemic risk the recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises this paper shows that a financial network can be most resilient for intermediate levels of risk diversification and not when this is maximal as generally thought so far this finding holds in the presence of the financial accelerator i e when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent s subsequent performance through the reaction of the agent s counterparties 2012 elsevier b v all rights reserved

forward looking solvency contagion abstract solvency contagion risk is a key channel through which systemic risk can come about we introduce a model that accounts not only for losses transmitted after banks default but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change we apply the model to run a series of simplified stress tests of the uk banking system from 2008 to 2016 based on two datasets of real interbank exposures between the seven major uk banks we show that risks due to solvency contagion decrease markedly from the peak of the crisis to the point of becoming negligible we also characterise the distributions of both vulnerabilities and systemic importances of individual banks thereby tracking the evolution of risk concentration

efficiency and stability of a financial architecture with too interconnected to fail institutions abstract the regulation of large interconnected financial institutions has become a key policy issue to improve financial stability regulators have proposed limiting banks size and interconnectedness i estimate a network based model of the over the counter interbank lending market in the us and quantify the efficiency stability implications of this policy trading efficiency decreases with limits on interconnectedness because the intermediation chains become longer while restricting the interconnectedness of banks improves stability the effect is non monotonic stability also improves with higher liquidity requirements when banks have access to liquidity during the crisis and when failed banks depositors maintain confidence in the banking system

monetary policy in a systemic crisis summary this paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort it is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market as the crisis developed liquidity vanished and the interbank market collapsed central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models at the same time as the interbank market did not allow for the redistribution of liquidity among ban ks central banks had to design new channels for liquidity injection

systemic risk mitigation in financial networks abstract we propose a multi period clearing framework where the level of systemic risk is mitigated through the provision of liquidity assistance the interbank liability network evolves stochastically over time and assets of defaulted banks are sold to qualified banks within the network through a first price sealed bid auction we find that policies targeting systemically important banks are more effective in core periphery network structures whereas those maximizing the total liquidity in the system are preferred in random network configurations we assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure

systemic risk in the netting system abstract in interbank clearing networks a bank experiencing sudden liquidity or solvency problems may prevent settlement of the claims of its direct creditors which may in turn jeopardize settlement of other institutions the paper presents an empirical assessment of the potential size of this domino effect in the italian netting system a participant s settlement failure is simulated and the impact on the rest of the system measured on average only about 4 percent of participants were large enough to trigger systemic crises less than 1 percent defaulted due to systemic reasons the average monetary loss was less than 3 percent of the daily flow of funds through the clearing system similar simulations by other authors for the u s system yielded a much larger impact of systemic risk we argue that the difference is mainly due to the much smaller volume of funds flowing through the italian system and to structural differences

macro networks an application to euro area financial accounts abstract this paper develops a financial network designated the macro network that depicts the connections between the main financial and non financial sectors of the economy in the various financial instruments of the euro area the macro network comprises of linkages across financial and non financial sectors in each country these country level sector networks are then connected by the cross border links between the individual banking sectors using the macro network to simulate financial shocks we find that the propagation effects depend on the underlying network structure which evolves over time after the financial crisis bilateral linkages contracted sharply reflecting the surge in counterparty risk and the de leveraging processes nonetheless our analysis suggests that even after this process vulnerabilities remained in the euro area financial system while a more diversified portfolio of cross border exposures might mitigate the shock effects we identify sectors which are most relevant for the propagation of financial shocks in the macro network

too interconnected to fail financial network of us cds market topological fragility and systemic risk a small segment of credit default swaps cds on residential mortgage backed securities rmbs stand implicated in the 2007 financial crisis the dominance of a few big players in the chains of insurance and reinsurance for cds credit risk mitigation for banks assets has led to the idea of too interconnected to fail titf resulting as in the case of aig of a tax payer bailout we provide an empirical reconstruction of the us cds network based on the fdic call reports for off balance sheet bank data for the 4th quarter in 2007 and 2008 the propagation of financial contagion in networks with dense clustering which reflects high concentration or localization of exposures between few participants will be identified as one that is titf those that dominate in terms of network centrality and connectivity are called super spreaders management of systemic risk from bank failure in uncorrelated random networks is different to those with clustering as systemic risk of highly connected financial firms in the cds or any other financial markets is not priced into their holding of capital and collateral we design a super spreader tax based on eigenvector centrality of the banks which can mitigate potential socialized losses

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

graph representation of balance sheets from exogenous to endogenous money a graph representation of the financial relations in a given monetary structure is proposed it is argued that the graph of debt liability relations is naturally organized and simplified into a tree structure around banks and a central bank indeed this optimal graph allows to perform payments very easily as it amounts to the suppression of loops introduced by pending payments using this language of graphs to analyze the monetary system we first examine the systems based on commodity money and show their incompatibility with credit after dealing with the role of the state via its ability to spend and raise taxes we discuss the chartalist systems based on pure fiat money which are the current systems we argue that in those cases the treasury and the central bank can be meaningfully consolidated after describing the interactions of various autonomous currencies we argue that fixed exchanged rates can never be maintained and we discuss the controversial role of the imf in international financial relations we finally use graph representations to give our interpretation on open problems such as the monetary aggregates the sectoral financial balances and the endogenous nature of money indeed once appropriately consolidated graphs of financial relations allow to formulate easily unambiguous statements about the monetary arrangements

failure and rescue in an interbank network this paper is concerned with systemic risk in an interbank market modelled as a directed graph of interbank obligations this builds on the modelling paradigm of eisenberg and noe eisenberg l noe th 2001 systemic risk in financial systems management sci 472 236 249 by introducing costs of default if loans have to be called in by a failing bank this immediately introduces novel and realistic effects we find that in general many different clearing vectors can arise among which there is a greatest clearing vector arrived at by letting banks fail in succession until only solvent banks remain such a collapse should be prevented if at all possible we then study situations in which consortia of banks may have the means and incentives to rescue failing banks this again departs from the conclusions of the earlier work of eisenberg and noe where in the absence of default losses there would be no incentive for solvent banks to rescue failing banks we conclude with some remarks about how a rescue consortium might be constructed this paper was accepted by wei xiong finance

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

the formation of financial networks modern banking systems are highly interconnected despite various benefits linkages between banks carry the risk of contagion in this article i investigate whether banks can commit ex ante to mutually insure each other when there is contagion risk in the financial system i model banks decisions to share this risk through bilateral agreements a financial network that allows losses to be shared among various counterparties arises endogenously i characterize the probability of systemic risk defined as the event that contagion occurs conditional on one bank failing in equilibrium interbank networks i show that there exist equilibria in which contagion does not occur