Cross-Border Exposures and Financial Contagion

Abstract

Cross-Border Exposures and Financial ContagionDegryse, H.A.; Elahi, M.A.; Penas, M.F. General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.-Users may download and print one copy of any publication from the public portal for the purpose of private study or research -You may not further distribute the material or use it for any profit-making activity or commercial gain -You may freely distribute the URL identifying the publication in the public portal Take down policyIf you believe that this document breaches copyright, please contact us providing details, and we will remove access to the work immediately and investigate your claim. CROSS-BORDER EXPOSURES AND FINANCIAL CONTAGION ABSTRACTIntegrated 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

Early warning of systemic risk in global banking: eigen-pair R number for financial contagion and market price-based methods

“…In the context of highly integrated international financial markets, the cross-border exposure of banks has been seen as one of the major catalysts for the GFC (Haldane 2009;Allen et al 2011;Minoiu and Reyes 2013;Castrén and Rancan 2014;Calabrese et al 2017). As pointed out by Degryse et al (2010) in their study of network contagion using the same CBS data, shocks that impact the proper functioning of this densely interconnected network of activities involving cross-border banking may affect not only banks themselves but also the economies they operate in. This is why it is vital to investigate the topological structure of global banking and its vulnerability to liabilities of debtor countries.…”

“…This is why it is vital to investigate the topological structure of global banking and its vulnerability to liabilities of debtor countries. However, as will be discussed, our analysis differs from Degryse et al (2010) in that they use former BIS Table 9D data which gave the exposures of reporting banking systems to the debt aggregated across all sectors of countries. Hence, in Degryse et al (2010) the contagion failure of non-bank sectors from banking sector failure is implicit and relies on an unspecied process they call "spill over effect".…”

“…The role of cross-border exposures in the dynamics of the GFC was most prominent in European banks (Calabrese and Osmetti 2019), which had surprisingly large exposure to US securitized assets (Allen et al 2011) and resulted in a 50% equity capital loss (valued at $1.6 trillion). This has led many to conclude that global financial interconnectedness is a major vehicle for macroeconomic instability (Soramäki et al 2007;Degryse et al 2010;Castrén and Rancan 2014;Simaan et al 2020) and systemic risk. The latter is associated with the "disruption to the flow of financial services that is caused by the impairment of all or parts of the financial system and has the potential to have serious negative spillovers to the real economy" (IMF- BIS-FSB 2009).…”

Network Analysis for Economics and Finance: An Application to Firm Ownership

“…Network techniques are not limited to model interlinkages across financial institutions at micro level. Some works consider as a node the overall banking sector of a country to investigate more aggregated effects [31] and the features of the global banking network [64]. 2 A complementary body of literature uses network modeling in economic theory reaching important achievements in the area of network formation, games of networks, and strategic interaction.…”

Macroeconomic and financial implications of multi‐dimensional interdependencies between OECD countries

“…11See Becker et al (2010), Degryse, Elahi, and Penas (2010), Fry‐McKibbin, Hsiao, and Tang (2014) and Mendoza and Quadrini (2010). …”