Journal Article

Financial Firm Bankruptcy and Contagion

Jean Helwege and Gaiyan Zhang

in Review of Finance

Volume 20, issue 4, pages 1321-1362
Published in print July 2016 | ISSN: 1572-3097
Published online October 2015 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1093/rof/rfv045
Financial Firm Bankruptcy and Contagion

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  • Banking
  • Investment Banking
  • Financial Regulation
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  • Money and Interest Rates
  • Monetary Policy, Central Banking, and the Supply of Money and Credit
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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The Lehman bankruptcy highlights the potential for interconnectedness to cause negative externalities through counterparty contagion, but the externalities may also arise from information contagion. We examine troubled financial firms and find that both channels are significant factors in creating spillover effects. Counterparty contagion is greater in cases of riskier firms and larger and more complex exposures. However, the counterparty exposures are small, especially among banks that face diversification regulations, and do not typically cause a cascade of failures. Information contagion is stronger for rivals in the same markets and has a larger impact in cases of distress than in bankruptcies.

Keywords: G21; G24; G28; G32; G33; E44; E58; E61

Journal Article.  18538 words. 

Subjects: Banking ; Investment Banking ; Financial Regulation ; Corporate Governance ; Bankruptcy ; Money and Interest Rates ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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