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The Systemic Risk of Cross-Border Banking: Evidence from the Sudden Stop and Interbank Stress Contagion in East Asia

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  • Chau H.A. Le
  • David G. Dickinson

Abstract

This article investigates the systemic risk of cross-border banking in East Asia. Using the recursive bivariate probit model, we jointly test the probability of the sudden stop in international lending and its simultaneous effect on the host countries’ interbank markets. The empirical results suggest that the risk of a sudden stop is associated with global liquidity shock; host country productivity shock; and the common lender contagion effect. This facilitates the transmission of interbank stress from advanced economies to emerging markets. However, the tension is mitigated by the “flight-home effect” caused by domestic investors’ repatriation. The sudden stop is more likely to occur in countries with lower financial openness but higher financial risk. Lending flows to the banking sectors are more sensitive to shocks than the flows to the non-bank private sectors.

Suggested Citation

  • Chau H.A. Le & David G. Dickinson, 2016. "The Systemic Risk of Cross-Border Banking: Evidence from the Sudden Stop and Interbank Stress Contagion in East Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(1), pages 237-254, January.
    • Handle: RePEc:mes:emfitr:v:52:y:2016:i:1:p:237-254
    DOI: 10.1080/1540496X.2015.1021643
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    Cited by:

    1. Shekhar Hari Kumar & Aakriti Mathur, 2020. "A fistful of dollars: Transmission of global funding shocks to EMs," IHEID Working Papers 04-2020, Economics Section, The Graduate Institute of International Studies, revised 08 Feb 2021.
    2. Nguyen, Dung Thuy Thi & Diaz-Rainey, Ivan & Roberts, Helen & Le, Minh, 2022. "The non-monotonic relationship between financial integration and cost efficiency: Evidence from East Asian commercial banks," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 418-438.
    3. Ha, Dao & Gillet, Philippe & Le, Phuong & Vo, Dinh-Tri, 2020. "Banking integration in ASEAN-6: An empirical investigation," Economic Modelling, Elsevier, vol. 91(C), pages 705-719.

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