The aim of the article is to answer the question whether there is a threat in the Polish banking system of spreading the results of insolvency or bankruptcy of a given group of banks, called the domino effect (contagion effect). By modifying the method proposed by Elsinger et. al. (2003) adequately and focusing the attention on the market for interbank placements, the author determines the degree of domino effect threat in the Polish banking system as of the end of 2003 and 2004. He shows in what way the financial situation of a given bank may depend on the capability to meet liabilities by other participants of the interbank market. In addition, the bank whose placements are not paid back may not be able to satisfy claims of other banks. A major deterioration in the bank's financial standing, in particular the bank's bankruptcy, may occur even if its financial statements do not indicate that there are any difficulties. To find out whether there is a threat of the domino effect which may adversely affect the assessment of financial system stability it is necessary to conduct a system analysis which should account, e.g. for relations between banks on the interbank placement market.

The indicator that serves to identify the contagion effect is the relation of the bank's unpaid and outstanding liabilities on the interbank market to the total value of placements in other banks. Using this ratio a few hypothetical situations that may occur in the banking system have been analysed. First, the assumption was made that one bank or a group of banks have gone bankrupt and the impact on the repayment of placements by other banks was analysed. Two variants of bankruptcy definition were taken into account - bankruptcy occurs either when the bank's capital falls below 0 or it falls below 50% of its initial value. Second, the author examines the bank's bankruptcy resulting from losses incurred due to market or credit risk that is not related to the interbank market. These risk categories are modelled through the value of banks' capital requirement which represents the bank's ability to absorb losses. Using rather strong assumptions necessary to conduct a constructive analysis it was possible to assess the loss in the banking sector assets caused by the domino effect. The losses assessment may serve to conduct accrued and deferred comparisons of the resistance of the banking sector to secondary bankruptcy threat. Notwithstanding the definitions of bank bankruptcy considered by the author, the model anticipates minor losses that might be incurred as a result of the contagion effect caused by a bankruptcy of one commercial bank in the financial situation in which the Polish banking sector was at the end of 2003 or 2004. The losses would probably not exceed 0.04% of the banking sector assets. The model also allows for the exclusion of cascade bankruptcy threat, i.e. a bank that has gone bankrupt as a secondary effect would not lead to the bankruptcy of other banks.