Cross-Border Exposures and Financial Contagion

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

Research output: Working paperDiscussion paperOther research output

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 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.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages39
Volume2009-008
Publication statusPublished - 2009

Publication series

NameTILEC Discussion Paper
Volume2009-008

Fingerprint

Cross-border
Financial contagion
Contagion
Liability
Banking risk
Banking
Russia
Statistics
Geographical proximity
Financial markets
Simulation
Threat
Assets
Financial system
Integrated
Propagation
Banking system
Risk sharing
Eastern Europe
Turkey

Keywords

  • Cross-border contagion
  • financial integration
  • financial stability

Cite this

Degryse, H. A., Elahi, M. A., & Penas, M. F. (2009). Cross-Border Exposures and Financial Contagion. (TILEC Discussion Paper; Vol. 2009-008). Tilburg: TILEC.
Degryse, H.A. ; Elahi, M.A. ; Penas, M.F. / Cross-Border Exposures and Financial Contagion. Tilburg : TILEC, 2009. (TILEC Discussion Paper).
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Degryse, HA, Elahi, MA & Penas, MF 2009 'Cross-Border Exposures and Financial Contagion' TILEC Discussion Paper, vol. 2009-008, TILEC, Tilburg.

Cross-Border Exposures and Financial Contagion. / Degryse, H.A.; Elahi, M.A.; Penas, M.F.

Tilburg : TILEC, 2009. (TILEC Discussion Paper; Vol. 2009-008).

Research output: Working paperDiscussion paperOther research output

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AU - Penas, M.F.

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AB - 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 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.

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KW - financial stability

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Degryse HA, Elahi MA, Penas MF. Cross-Border Exposures and Financial Contagion. Tilburg: TILEC. 2009. (TILEC Discussion Paper).