Cascading bankruptcies under simultaneous sectorial shocks: Theory and application to the Tunisian banking sector

This paper proposes a theoretical framework modelling the effect of simultaneous sectorial shocks on the banking system resilience, in presence of overlapping portfolio risk. A sectorial shock decreases the value of banks' assets and solvency. We show that beyond a determined threshold, the reg...

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Bibliographic Details
Published in:International journal of finance and economics 2024-04, Vol.29 (2), p.1696-1706
Main Authors: Nabi, Mahmoud‐Sami, Fersi, Sami
Format: Article
Language:English
Subjects:
banking network
bankruptcy
portfolio risk
sectorial shocks
systemic banking risk
Tunisia
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Summary:This paper proposes a theoretical framework modelling the effect of simultaneous sectorial shocks on the banking system resilience, in presence of overlapping portfolio risk. A sectorial shock decreases the value of banks' assets and solvency. We show that beyond a determined threshold, the regulator (central bank) shall intervene in order to avoid that simultaneous sectorial shocks lead to bankruptcies in a cascading process. The model is simulated in the context of the Tunisian banking system for a variety of extreme macroeconomic conditions (economic recession and inflation). The simulations show that the simultaneous shocks to industry, commerce and real estate sectors might lead to the bankruptcies of one to 10 banks among the 23 Tunisian banks via the cascading contagion channel, in the absence of a prompt and adequate intervention by the regulator.
ISSN:1076-9307
1099-1158
DOI:10.1002/ijfe.2750