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Credit and liquidity risks represent main channels of financial contagion forinterbank lending markets. On one hand, banks face potential losses whenevertheir counterparties are under distress and thus unable to fulfill theirobligations. On the other hand, solvency constraints may force banks to recoverlost fundings by selling their illiquid assets, resulting in effective lossesin the presence of fire sales - that is, when funding shortcomings arewidespread over the market. Because of the complex structure of the network ofinterbank exposures, these losses reverberate among banks and eventually getamplified, with potentially catastrophic consequences for the whole financialsystem. Building on Debt Rank [Battiston et al., 2012], in this work we definea systemic risk metric that estimates the potential amplification of losses ininterbank markets accounting for both credit and liquidity contagion channels:the Debt-Solvency Rank. We implement this framework on a dataset of 183European banks that were publicly traded between 2004 and 2013, showing indeedthat liquidity spillovers substantially increase systemic risk, and thus cannotbe neglected in stress-test scenarios. We also provide additional evidence thatthe interbank market was extremely fragile up to the 2008 financial crisis,becoming slightly more robust only afterwards.

Entangling credit and funding shocks in interbank markets