Simulation methods to assess the danger of contagion in interbank markets

Researchers increasingly turn to counterfactual simulations to estimate the danger of contagion owing to exposures in the interbank loan market. This paper summarises the findings of such simulations, provides a critical assessment of the modelling assumptions on which they are based, and discusses their use in financial stability analysis. On the whole, such simulations suggest that contagious defaults are unlikely but cannot be fully ruled...