Testing for East-West contagion in the European banking sector during the financial crisis
AbstractLarge and growing international financial linkages between East and West have altered the nature of the stability risks faced by European banking systems, increasing susceptibility to contagion. This paper aims to identify potential risks of cross-border contagion using a sample of large Western and Eastern European banks. We assume that contagion risk is associated with extreme co-movements in a market-based measure of bank soundness, controlling for common underlying factors. We also find evidence that contagion risk across European banks heightened significantly during the recent crisis. Contagion among Western European banks with the highest market share in Eastern Europe and from this group to Eastern European banks shows the largest increase in our sample. We find also evidence of contagion spreading from Eastern European banks, but this effect seems to reflect a broader phenomenon of contagion from emerging markets to banks in advanced countries exposed to these markets. Finally, our findings offer only mixed evidence of the existence of a direct ownership channel in the transmission of contagion.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 790.
Date of creation: Feb 2011
Date of revision:
Banking contagion; Distance to default; Testing hypothesis; Logit model;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-19 (All new papers)
- NEP-BAN-2011-03-19 (Banking)
- NEP-EEC-2011-03-19 (European Economics)
- NEP-EUR-2011-03-19 (Microeconomic European Issues)
- NEP-TRA-2011-03-19 (Transition Economics)
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.:
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"Systemic Risk: A Survey,"
CEPR Discussion Papers
2634, C.E.P.R. Discussion Papers.
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- Arnaud Jobert & Janet Kong & Jorge A. Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
- Jorge A. Chan-Lau & Srobona Mitra & Li L. Ong, 2007. "Contagion Risk in the International Banking System and Implications for London as a Global Financial Center," IMF Working Papers 07/74, International Monetary Fund.
- International Monetary Fund, 2000. "Spillovers Through Banking Centers - A Panel Data Analysis," IMF Working Papers 00/88, International Monetary Fund.
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