Insolvency and contagion in the Brazilian interbank market

•The contagion chain in the interbank market has a short propagation path.•Size is not the sole determinant of the amount of contagion losses.•Only banks originate contagion; most of them are large or medium-sized.•Most vulnerable financial institutions are not banks.•We compute a financial system 1-year horizon expected losses lower bound.

This paper proposes a new way to model and analyze contagion in interbank networks. We use a unique dataset from the Brazilian financial system and include all active financial intermediaries. We show that the contagion chain has a short propagation path. We find that first-round contagion is generated only by banks and that medium-sized banks can generate contagion, which implies that size is not the sole determinant of importance within networks. Most vulnerable financial institutions are not banks. Finally, we compute a lower bound for the financial system expected losses in a 1-year horizon. The results contribute to the development of a financial stability-monitoring toolkit.