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Cross-Border Exposures and Financial Contagion

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  • Degryse, H.A.

    (Tilburg University, School of Economics and Management)

  • Elahi, M.A.

    (Tilburg University, School of Economics and Management)

  • Penas, M.F.

    (Tilburg University, School of Economics and Management)

Abstract

Integrated financial markets provide opportunities for expansion and improved risk sharing, but also pose threats of contagion risk through cross‐border exposures. This paper examines cross‐border contagion risk over the period 1999–2006. To that purpose we use aggregate cross‐border exposures of 17 countries as reported in the Bank for International Settlements Consolidated Banking Statistics. We find that a shock that affects the liabilities of one country may undermine the stability of the entire financial system. Particularly, a shock wiping out 25% (35%) of US (UK) cross‐border liabilities against non‐US (non‐UK) banks could lead to bank contagion eroding at least 94% (45%) of the recipient countries' banking assets. We also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Our simulations also reveal that the ‘speed of propagation of contagion’ has increased in recent years resulting in a higher number of directly exposed banking systems. Finally, we find that contagion is more widespread in geographical proximities.
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Suggested Citation

  • Degryse, H.A. & Elahi, M.A. & Penas, M.F., 2009. "Cross-Border Exposures and Financial Contagion," Other publications TiSEM 9c71b91d-76f5-4b50-b722-b, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:9c71b91d-76f5-4b50-b722-b3d1d8e8dff7
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    References listed on IDEAS

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    Cited by:

    1. Degryse, H.A. & Elahi, M.A. & Penas, M.F., 2012. "Determinants of Banking System Fragility : A Regional Perspective," Discussion Paper 2012-015, Tilburg University, Center for Economic Research.
    2. Silvia Gabrieli & Dilyara Salakhova, 2019. "Cross-border interbank contagion in the European banking sector," International Economics, CEPII research center, issue 157, pages 33-54.
    3. Fathin Faizah Said, 2017. "Global Banking on the Financial Network Modelling: Sectorial Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 227-253, February.
    4. Edgar Mata Flores, 2016. "International shocks and macroeconomics: a new multi-country DSGE platform for policy analysis in OECD countries," EcoMod2016 9487, EcoMod.
    5. Mr. Thierry Tressel, 2010. "Financial Contagion Through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis," IMF Working Papers 2010/236, International Monetary Fund.
    6. Claudia M. Buch & Katja Neugebauer, 2009. "Diversification of Banks' International Portfolios: Evidence and Policy Lessons," Working Paper / FINESS 2.4, DIW Berlin, German Institute for Economic Research.
    7. repec:diw:diwfin:diwfin02040 is not listed on IDEAS
    8. Toivanen, Mervi, 2013. "Contagion in the interbank network: An epidemiological approach," Bank of Finland Research Discussion Papers 19/2013, Bank of Finland.
    9. Fricke, Daniel, 2010. "Contagion between European and US banks: Evidence from equity prices," Kiel Working Papers 1667, Kiel Institute for the World Economy (IfW Kiel).
    10. Stefan Avdjiev & Christian Dembiermont & Blaise Gadanecz & Branimir Gruić & Patrick McGuire & Swapan Kumar Pradhan & Paul Van den Bergh & Philip Wooldridge & Bruno Tissot & Marie-Céline Bard & Xavier-, 2015. "IAG Reference document on Consolidation and corporate groups: an overview of methodological and practical issues," IFC Reports 1, Bank for International Settlements.
    11. Wang, Dan & Huang, Wei-Qiang, 2021. "Centrality-based measures of financial institutions’ systemic importance: A tail dependence network view," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 562(C).
    12. Katja Neugebauer, 2010. "Schockübertragung und Drittlandeffekte auf internationalen Bankenmärkten," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 79(4), pages 59-74.
    13. Sedunov, John, 2021. "Federal reserve intervention and systemic risk during financial crises," Journal of Banking & Finance, Elsevier, vol. 133(C).

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    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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