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The Bright and the Dark Side of Cross-Border Banking Linkages

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  • Sònia Muñoz
  • Ryan Scuzzarella
  • Martin Cihák
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    Abstract

    When a country''s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country''s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/186.

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    Length: 51
    Date of creation: 01 Aug 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/186

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    Keywords: Bank supervision; Banking crisis; Banking systems; Economic models; Financial stability; International banking; banking; banking crises; banking sector; banking system; banking network; banking sectors; crisis probability; deposit insurance; contagion; banking statistics; banking stability; bank runs; banking sector stability; financial crisis; bank of england; bank capitalization; systemic banking crises; currency crises; banks ? assets; financial crises; bank deposits; insurance premium; foreign exchange; bank closures; systemic risk; bank for international settlements; banking distress; bank failures; return on assets; bank regulation; interbank market; bank connectivity; bank claims; bank failure; banking supervision; banking crisis probability; global financial crisis; banks ? asset; recessions; banking sector fragility; bank risk-taking; bank panic; bankrupt; bank balance sheet; resolution of banking crises; bank network; banking panics; banking system fragility; central banking; early warning systems; bank distress; banking panic; banking networks; financial contagion; financial reforms; bank policy; macroeconomic policies; bankrupt firm; bank fragility; bank capital; systemic financial crises; banking sector problems; bank loans; bank risk; subordinated debt; bank assets; financial risk; bank data; bank relationships; early warning system; net interest margin;

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    Cited by:
    1. Barth, James R. & Caprio, Gerard, Jr. & Levine, Ross, 2012. "The evolution and impact of bank regulations," Policy Research Working Paper Series 6288, The World Bank.
    2. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.

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