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Does Financial Connectedness Predict Crises?

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  • Camelia Minoiu
  • Chanhyun Kang
  • V.S. Subrahmanian
  • Anamaria Berea

Abstract

The global financial crisis has reignited interest in models of crisis prediction. It has also raised the question whether financial connectedness - a possible source of systemic risk - can serve as an early warning indicator of crises. In this paper we examine the ability of connectedness in the global network of financial linkages to predict systemic banking crises. Our results indicate that increases in a country's financial interconnectedness and decreases in its neighbors' connectedness are associated with a higher probability of banking crises after controlling for macroeconomic fundamentals.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/267.

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Length: 44
Date of creation: 24 Dec 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/267

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Keywords: Global Financial Crisis 2008-2009; Financial crisis; Banking crisis; Financial risk; Economic integration; early warning systems; systemic risk; financial networks; banking crises; banking systems; banking network; banking networks; systemic banking crises; systemic banking crisis; banking assets; banking system exposures; bank relationships; banking distress; bank portfolios; banking transactions; banking statistics; contagion; interbank market; systemic banking distress; bank exposure; currency crises; foreign asset;

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References

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  1. Era Dabla-Norris & Yasemin Bal-Gunduz, 2012. "Exogenous Shocks and Growth Crises in Low-Income Countries," IMF Working Papers 12/264, International Monetary Fund.
  2. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  3. Julián Caballero, 2012. "Banking Crises and Financial Integration," IDB Publications 78599, Inter-American Development Bank.
  4. Allen, Franklin & Babus, Ana & Carletti, Elena, 2012. "Asset commonality, debt maturity and systemic risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 104(3), pages 519-534.
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  6. 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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  8. Abdul Abiad, 2003. "Early Warning Systems," IMF Working Papers 03/32, International Monetary Fund.
  9. Galina Hale, 2011. "Bank relationships, business cycles, and financial crisis," Working Paper Series, Federal Reserve Bank of San Francisco 2011-14, Federal Reserve Bank of San Francisco.
  10. Julian Caballero & Christopher Candelaria & Galina Hale, 2009. "Bank relationships and the depth of the current economic crisis," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue dec14.
  11. Sven Blank & Claudia M. Buch, 2010. "International Bank Portfolios: Short- and Long-Run Responses to Macroeconomic Conditions," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 18(2), pages 289-306, 05.
  12. Joseph E. Stiglitz, 2010. "Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 388-92, May.
  13. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  14. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, Elsevier, vol. 27(3), pages 520-533, September.
  15. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  16. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  17. Fabian Valencia & Luc Laeven, 2012. "Systemic Banking Crises Database: An Update," IMF Working Papers 12/163, International Monetary Fund.
  18. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  19. Minoiu, Camelia & Reyes, Javier A., 2013. "A network analysis of global banking: 1978–2010," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(2), pages 168-184.
  20. Sven Blank & Claudia M Buch, 2007. "The Euro and Cross-Border Banking: Evidence from Bilateral Data," Comparative Economic Studies, Palgrave Macmillan, vol. 49(3), pages 389-410, September.
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