Cross-border exposure and financial contagion

H.A. Degryse, M.A. Elahi, M.F. Penas

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)209-240
JournalInternational Review of Finance
Volume10
Issue number2
Publication statusPublished - 2010

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    Degryse, H. A., Elahi, M. A., & Penas, M. F. (2010). Cross-border exposure and financial contagion. International Review of Finance, 10(2), 209-240.