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Contagion Risk in the International Banking System and Implications for London as a Global Financial Center

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Author Info
Li L. Ong
Srobona Mitra
Jorge A. Chan-Lau
Abstract

In this paper, we use the extreme value theory (EVT) framework to analyze contagion risk across the international banking system. We test for the likelihood that an extreme shock affecting a major, systemic U.K. bank would also affect another large local or foreign counterpart, and vice-versa. Our results reveal several key trends among major global banks: contagion risk among banks exhibits "home bias"; individual banks are affected differently by idiosyncratic shocks to their major counterparts; and banks are affected differently by common shocks to the real economy or financial markets. In general, bank soundness appears more susceptible to common (macro and market) shocks when the global environment is turbulent; this may have important implications for London as a major financial services and capital markets hub.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/74.

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Length: 46 pages
Date of creation: 03 Apr 2007
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Handle: RePEc:imf:imfwpa:07/74

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Keywords: Bank soundness ; International banking ; Economic models ;

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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. Stéphanie Stolz & Marina Moretti & Mark Swinburne, 2008. "Stress Testing at the IMF," IMF Working Papers 08/206, International Monetary Fund. [Downloadable!]
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