Cross-border Interbank Contagion Risk Analysis

A number of recent empirical studies by central banks and the academic literature have focused on the impact of the Great Financial Crisis (GFC) and on the systemic stability of the financial system as a whole. The complex financial cross-border interbank linkages conceal possible idiosyncratic shocks that may cause spillovers to other financial systems. It is imperative that financial regulators deploy models that allow them to monitor not only the soundness of SIBs but also the potential contagion risk caused by cross-country interbank linkages in Asian emerging market economies (AEME). This collaborative research project on “Cross-border Interbank Contagion Risk Analysis” investigates cross-border interbank claims and liabilities of the individual countries located in the Asia-Pacific region. The study contributes to current research cross-border interbank contagion risk in the following ways: Firstly, this is the first study that is exclusively focused on Asian-Pacific countries, while taking into consideration the effect of the most developed economies and key financial centres. Secondly, the applied visual network analysis allows us to capture the flows of funds and highlight the financial linkages across the analyzed countries. The analysis unambiguously shows that the volume of transactions has dramatically increased, particularly after 1997. There is also supportive evidence that the connectedness of economies in the Asia-Pacific region since 1997 has changed completely, specifically that the structure of how countries are connected now is significantly different. The links across the selected countries have become much closer and the volume of credit transactions has increased severalfold. The results further indicate that since 2016, there is the strong dominance of Hong Kong and China in the regional financial system. This type of structural change will necessarily have implications on system stability not only in terms of regional stability but also on a global scale. Yet, the dominance of Hong Kong and its extensive links with China are remarkable, but not surprising. The study also concludes that a more comprehensive analysis of contagion risk with the help of more complex methodological frameworks can be conducted only if the reported statistics are improved, as studies capable of detecting possible triggers of systemic risk require much more disaggregated statistical information.