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Banking Crises and Contagion: Empirical Evidence

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Author Info
Eric Santor

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Abstract

Recent events, such as the East Asian, Mexican, Scandinavian, and Argentinian crises, have sparked considerable interest in exploring how shocks experienced by one country can spread vis-à-vis real and nominal links to other countries' banking systems. Given the large costs associated with banking-system failures, both economists and policy-makers are interested in predicting the onset of banking crises and assessing the likelihood of contagion during crisis events. The author uses cross-country panel data to examine contagion across banking systems in developed and developing countries. Particular attention is paid to the construction of the cross-country sample: matching-method techniques are used to construct a suitable control-group sample analogue to the set of crisis countries to accurately quantify the probability of the occurrence of a banking crisis and the probability of banking-system contagion. The author finds that the sample choices of previous studies introduced bias into the estimates of the probability that a banking crisis would occur, owing to differences between the supports of the conditioning variables for the crisis and non-crisis country groups. Furthermore, the probability of a banking crisis increases when countries have macroeconomic characteristics similar to those that have recently experienced a crisis, regardless of the degree of actual economic linkages between the countries. This suggests that information contagion plays a larger role than previously suspected.

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Paper provided by Bank of Canada in its series Working Papers with number 03-1.

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Length: 61 pages
Date of creation: 2003
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Handle: RePEc:bca:bocawp:03-1

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Keywords: International topics;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
G20 - Financial Economics - - Financial Institutions and Services - - - General

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Francis, 2003. "Governance and Financial Fragility: Evidence from a Cross-Section of Countries," Working Papers 03-34, Bank of Canada. [Downloadable!]
  2. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics. [Downloadable!]
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