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Financial connectivity and excessive liquidity: Benefit or risk?

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  • Demir, Müge
  • Önder, Zeynep

Abstract

This paper explores the structure of cross-border lending market by using network analysis and examines the relationship between financial connectivity and probability of systemic crises during normal, credit boom and capital inflow upsurge periods, controlling for macroeconomic variables. A country-level panel data set for bank-to-bank and bank-to-non-bank cross-border lending markets of 13 advanced economies is used in the analysis for the 1978–2016 period. We find that a rise in financial connectivity reduces the probability of systemic crises. However, this effect is found to be mitigated or completely eliminated in credit boom and capital inflow upsurge periods in both markets. The findings suggest that bank-to-non-bank lending market is more stable in terms of both the number and the amount of lending relationships and recovered faster than bank-to-bank lending market following the recent global financial crisis.

Suggested Citation

  • Demir, Müge & Önder, Zeynep, 2019. "Financial connectivity and excessive liquidity: Benefit or risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 203-221.
    • Handle: RePEc:eee:intfin:v:62:y:2019:i:c:p:203-221
    DOI: 10.1016/j.intfin.2019.07.004
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    More about this item

    Keywords

    Cross-border banking; Network analysis; Financial connectivity; Systemic crises;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G19 - Financial Economics - - General Financial Markets - - - Other

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