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Financial Contagion Through Bank Deleveraging

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  • Thierry Tressel

Abstract

The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/236.

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Length: 37
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/236

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Keywords: Banks; Economic models; External shocks; Global Financial Crisis 2008-2009; International banking; claims; banking; banking system; banking statistics; banking systems; banking activities; interbank market; bank capital; claim; bank balance sheet; bank of england; recapitalization; banks ? balance sheets; bank losses; foreign _ asset; bank for international settlement; bank risk; bank liabilities; bank holdings companies; capital adequacy ratio; bank defaults; bank holding company; banking assets; banks liabilities; bank regulation; capital adequacy; banking networks; holding company; retained earnings; bank assets; bank risk taking; bank holdings; bank policy; bank for international settlements;

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References

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  1. Nicola Cetorelli & Linda S. Goldberg, 2010. "Global banks and international shock transmission: evidence from the crisis," Staff Reports 446, Federal Reserve Bank of New York.
  2. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress From Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
  3. Stolz, Stéphanie Marie & Wedow, Michael, 2010. "Extraordinary measures in extraordinary times: Public measures in support of the financial sector in the EU and the United States," Discussion Paper Series 1: Economic Studies 2010,13, Deutsche Bundesbank, Research Centre.
  4. Hans Degryse & Muhammad Ather Elahi & Maria Fabiana Penas, 2010. "Cross-Border Exposures and Financial Contagion," International Review of Finance, International Review of Finance Ltd., vol. 10(Financial), pages 209-240.
  5. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking globalization, monetary transmission, and the lending channel," Staff Reports 333, Federal Reserve Bank of New York.
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Cited by:
  1. von Furstenberg, George M., 2011. "Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue?," Discussion Paper Series 2: Banking and Financial Studies 2011,01, Deutsche Bundesbank, Research Centre.
  2. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
  3. Nicolas Arregui & Mohamed Norat & Antonio Pancorbo & Jodi G. Scarlata & Eija Holttinen & Fabiana Melo & Jay Surti & Christopher Wilson & Rodolfo Wehrhahn & Mamoru Yanase, 2013. "Addressing Interconnectedness," IMF Working Papers 13/199, International Monetary Fund.
  4. Eugenio Cerutti & Patrick M. McGuire & Stijn Claessens, 2011. "Systemic Risks in Global Banking," IMF Working Papers 11/222, International Monetary Fund.

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