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

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  • Jorge A. Chan-Lau
  • Srobona Mitra
  • Li L. Ong

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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Bibliographic Info

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

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Length: 46
Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/74

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Keywords: Bank soundness; International banking; Economic models; banking; stock market; financial institutions; banking system; financial sector; financial system; bond; banking sector; financial markets; bank of england; stock market indices; financial stability; banking systems; international banks; financial services; banking statistics; stock returns; hedge; bank for international settlements; bankers; local stock market; government bond; bondholders; bankers ? association; hedge funds; financial contagion; stock market capitalization; stock market index; bonds; financial systems; credit derivatives; government bond yields; money market; government bonds; stock index; bond yield; derivatives market; bank lending; financial economics; interbank money market; equity markets; stock price; interbank market; financial instruments; bond yields; tier 1 capital; government bond yield; stock markets; stock price index; financial market; banking sector assets; banking assets; bank linkages; local stock markets; market bond; global stock market; hedge fund; coupon bond; banking services; bank vulnerabilities; financial futures; bank capital standards; bank fragility; international financial system; international bonds; banks ? loan; bank relationships; banking businesses; bond index; bank capital; international financial futures; stock exchange; foreign equity; stock exchanges; bond market; bank equity; investment bank; bank size; home banking; bank stocks; foreign exchange; private banking; financial risk; national bank; banking business; stock market volatility; world stock market; bankers association;

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References

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Citations

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Cited by:
  1. Pais, Amelia & Stork, Philip A., 2011. "Contagion risk in the Australian banking and property sectors," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(3), pages 681-697, March.
  2. Mark Swinburne & Stéphanie Marie Stolz & Marina Moretti, 2008. "Stress Testing At the IMF," IMF Working Papers 08/206, International Monetary Fund.
  3. Kimie Harada & Takatoshi Ito & Shuhei Takahashi, 2010. "Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies," NBER Working Papers 16182, National Bureau of Economic Research, Inc.
  4. Toni Gravelle & Fuchun Li, 2011. "Measuring Systemic Importance of Financial Institutions: An Extreme Value Theory Approach," Working Papers, Bank of Canada 11-19, Bank of Canada.
  5. Harada, Kimie & Ito, Takatoshi & Takahashi, Shuhei, 2013. "Is the Distance to Default a good measure in predicting bank failures? A case study of Japanese major banks," Japan and the World Economy, Elsevier, Elsevier, vol. 27(C), pages 70-82.
  6. International Monetary Fund, 2009. "Spillovers From the Rest of the World Into Sub-Saharan African Countries," IMF Working Papers 09/155, International Monetary Fund.
  7. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers), Bank of Italy, Economic Research and International Relations Area 99, Bank of Italy, Economic Research and International Relations Area.
  8. Emidio Cocozza & Paolo Piselli, 2011. "Testing for East-West contagion in the European banking sector during the financial crisis," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 790, Bank of Italy, Economic Research and International Relations Area.
  9. Kimie Harada & Takatoshi Ito, 2008. "Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks," NBER Working Papers 14518, National Bureau of Economic Research, Inc.
  10. Stacia Howard, 2009. "Stress testing with incomplete data: a practical guide," IFC Bulletins chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008, volume 31, pages 344-355 Bank for International Settlements.

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