Assessing Financial Contagion in the Interbank Market: Maximum Entropy Versus Observed Interbank Lending Patterns

Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may represent a channel for contagion as a bank default may spread to other banks through interbank linkages. This paper analyses how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information about bilateral exposures was not available in most of the previous works, they...