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The contagious capacity of the international banking network: 1985-2009

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  • Garratt, Rodney
  • Mahadeva, Lavan
  • Svirydzenka, Katsiaryna

Abstract

Systemic risk among the network of international banking groups arises when financial stress threatens to crisscross many national boundaries and expose imperfect international coordination. To assess this risk, we use Rosvall and Bergstrom’s (PNAS, 2008, 1118-1123) information theoretic map equation to partition banking groups from 21 countries into modules. We consider a quarter of a century of data on the cross-border interbank market. We show that in the late 1980s four important financial centres formed one large super cluster that was highly contagious in terms of transmission of stress within its ranks, but less contagious on a global scale. But the expansion leading to the 2008 crisis left more transmitting hubs sharing the same total influence as a few large modules had previously. We show that this greater entanglement meant the network was more broadly contagious, and not that risk was more shared. Thus, our analysis contributes to our understanding as to why defaults in US sub-prime mortgages spread quickly through the network.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt0r89f16p.

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Date of creation: 16 Oct 2011
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Handle: RePEc:cdl:ucsbec:qt0r89f16p

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Keywords: Social and Behavioral Sciences; Contagion; Finance; Networks;

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  1. Allen, Franklin & Gale, Douglas, 1998. "Financial Contagion," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-33, C.V. Starr Center for Applied Economics, New York University.
  2. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(1), pages 3-25, Winter.
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  7. Andrew G Haldane & Adrian Penalver & Victoria Saporta & Hyun Song Shin, 2003. "Analytics of sovereign debt restructuring," Bank of England working papers, Bank of England 203, Bank of England.
  8. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  9. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 145-168, June.
  10. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Joseph E. Stiglitz, 2009. "Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk," NBER Working Papers 15611, National Bureau of Economic Research, Inc.
  11. Henri Bernard & Joseph Bisignano, 2000. "Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure," BIS Working Papers, Bank for International Settlements 86, Bank for International Settlements.
  12. Stijn Claessens & Luc Laeven & Deniz Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications From the Global Financial Crisis," IMF Working Papers, International Monetary Fund 10/44, International Monetary Fund.
  13. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
  14. Manmohan Singh & Miguel A. Segoviano Basurto, 2008. "Counterparty Risk in the Over-The-Counter Derivatives Market," IMF Working Papers, International Monetary Fund 08/258, International Monetary Fund.
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