Cross-Border Exposures and Financial Contagion

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][2000][2001][2002][2003][2004][2005][2006]. To that purpose we use aggregate cross-border exposures of seventeen countries as reported in the BIS Consolidated Banking Statistics. We find that a shock which 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. JEL Classification Codes: G15, G20, G29

Home-Host Banking Issues and Non-Core Funding—Evidence from Central and Eastern Europe

“…Hahm et al (2013) for instance, document that non-core funding played a great role in amplifying the deleveraging effects and the vulnerability of the financial sector while (Angeloni et al 2010) argue that it strengthened the impact of the balance sheet channel. On the other hand, the inteconnectedness of the financial conglomerates and their subsidiaries has increased markedly in the period prior to the financial crisis and decreased subsequently in the aftermath, (Minoiu and Reyes 2013) or (Degryse et al 2010). Taken together these evidence provides grounds for a more granular investigation of the non-core funding in the CESEE banking sectors.…”