Bank networks, interbank liquidity runs and the identification of banks that are Too InterConnected to Fail

We simulate interbank market contagion, enriching the standard transmission channel based on credit losses and capital, with new channels like funding liquidity losses, fire assets sales and active liquidity runs on infected banks, employing a testing dataset of Russian bilateral interbank exposures. Allowing active liquidity runs on infected banks is crucial to capture reality with the simulations. We use the simulations to calculate a bank’s potential contribution to contagion, which serves as our measure of systemic importance. We find that the K-shell index, a new measure of interconnectedness, is the only robust and reliable predictor of a individual bank’s potential to spread contagion, rather than size. Coreness should therefore not be confounded with size. JEL: C8, G21