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In spite of the growing theoretical literature on cascades of failures ininterbank lending networks, empirical results seem to suggest that networks ofdirect exposures are not the major channel of financial contagion. In thispaper we show that networks of interbank exposures can however significantlyamplify contagion due to overlapping portfolios. To illustrate this point, weconsider the case of the Austrian interbank network and perform stress tests onit according to different protocols. We consider in particular contagion due to(i) counterparty loss; (ii) roll-over risk; and (iii) overlapping portfolios.We find that the average number of bankruptcies caused by counterparty loss androll-over risk is fairly small if these contagion mechanisms are considered inisolation. Once portfolio overlaps are also accounted for, however, we observethat the network of direct interbank exposures significantly contributes tosystemic risk.

How interbank lending amplifies overlapping portfolio contagion: A case study of the Austrian banking network