  In spite of the growing theoretical literature on cascades of failures in
interbank lending networks, empirical results seem to suggest that networks of
direct exposures are not the major channel of financial contagion. In this
paper we show that networks of interbank exposures can however significantly
amplify contagion due to overlapping portfolios. To illustrate this point, we
consider the case of the Austrian interbank network and perform stress tests on
it 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 and
roll-over risk is fairly small if these contagion mechanisms are considered in
isolation. Once portfolio overlaps are also accounted for, however, we observe
that the network of direct interbank exposures significantly contributes to
systemic risk.
