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Banking Crises and Contagion: Empirical Evidence

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  • Eric Santor

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:bca:bocawp:03-1

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Keywords: International topics;

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References

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Cited by:
  1. Eric Santor, 2007. "Contagion and the composition of Canadian banks' foreign asset portfolios: do financial crises matter?," CGFS Papers chapters, in: Bank for International Settlements (ed.), Research on global financial stability: the use of BIS international financial statistics, volume 29, pages 32-52 Bank for International Settlements.
  2. Klüh, Ulrich, 2005. "Safety Net Design and Systemic Risk: New Empirical Evidence," Discussion Papers in Economics 662, University of Munich, Department of Economics.
  3. Michael Francis, 2003. "Governance and Financial Fragility: Evidence from a Cross-Section of Countries," Working Papers 03-34, Bank of Canada.
  4. Blank, Sven & Buch, Claudia M. & Neugebauer, Katja, 2009. "Shocks at large banks and banking sector distress: The Banking Granular Residual," Journal of Financial Stability, Elsevier, vol. 5(4), pages 353-373, December.
  5. ?tefan Rychtárik & Franco Stragiotti, 2009. "Liquidity Risk Monitoring Framework: A Supervisory Tool," BCL working papers 43, Central Bank of Luxembourg.

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