No. 207 - An Assessment of Systemic Risk in the Italian Clearing System

In clearing systems, failure to settle by one participant may prevent settlement of direct creditors, which may in turn jeopardize settlement of other institutions. The paper presents an empirical assessment of the potential size of this "domino effect" in the Italian clearing system. A participant's settlement failure is simulated, and the impact on its counterparts is measured. According to our simulations, on average about 4 per cent of the system participants are able to trigger systemic crises; less than 1 per cent default due to systemic reasons; the average monetary value of systemic losses is 200 billion Italian lire, equal to 2.7 per cent of the daily flow of funds in the system. Similar simulations performed by other authors for the US clearing system yielded a much larger impact of systemic risk. We argue that the difference with respect to our results is mainly due to the much lower volume of funds flowing through the Italian system and to structural differences between the latter and the US system.