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On the importance of indirect banking vulnerabilities in the Eurozone

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  • Bicu Andreea
  • Candelon Bertrand

    (METEOR)

Abstract

This paper investigates banking and sovereign distress in the Eurozone and the importance ofdirect and indirect fi nancial exposures. We use BIS cross-border direct banking flows to linkmember states in a GVAR framework and jointly model sectoral CDS premia. Based on balance sheetpositions of an intermediate debtor country, we calculate indirect exposures and asses how thelevel of interconnectedness is impacted when indirect links are accounted for. We notice a generalslowdown in fi nancial integration and a reduction in cross-border assets in the hope of limitinginternational contagion. By diff erentiating between direct and indirect links, we show that theimpact of reduced weights on core member states is insigni ficant and that deleveraging strategiesare not able to successfully reduce risk.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 033.

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Date of creation: 2012
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Handle: RePEc:unm:umamet:2012033

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Keywords: international economics and trade ;

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  1. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 04.6, Institute of Economic Policy Research (IEPR).
  2. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci & TengTeng Xu, 2012. "China’s Emergence in the World Economy and Business Cycles in Latin America," Working Papers, Bank of Canada 12-32, Bank of Canada.
  3. Silvia Sgherri & Alessandro Galesi, 2009. "Regional Financial Spillovers Across Europe," IMF Working Papers 09/23, International Monetary Fund.
  4. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data B4-1, International Conferences on Panel Data.
  5. Adrian Alter & Yves Stephan Schüler, 2011. "Credit Spead Interdependencies of European States and Banks during the Financial Crisis," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2011-24, Department of Economics, University of Konstanz.
  6. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
  7. Bolton, Patrick & Jeanne, Olivier, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8358, C.E.P.R. Discussion Papers.
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  10. Gerlach, Stefan & Schulz, Alexander & Wolff, Guntram B., 2010. "Banking and Sovereign Risk in the Euro Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7833, C.E.P.R. Discussion Papers.
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  13. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9710, Faculty of Economics, University of Cambridge.
  14. Brad Setser & Ioannis Halikias & Alexander Pitt & Christoph B. Rosenberg & Brett E. House & Jens Nystedt & Christian Keller, 2005. "Debt-Related Vulnerabilities and Financial Crises," IMF Occasional Papers 240, International Monetary Fund.
  15. Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, Elsevier, vol. 110(1), pages 28-31, January.
  16. Chiara Angeloni & Guntram B. Wolff, 2012. "Are banks affected by their holdings of government debt?," Working Papers, Bruegel 717, Bruegel.
  17. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 271-85, March.
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Cited by:
  1. Alter, Adrian & Beyer, Andreas, 2012. "The dynamics of spillover effects during the European sovereign debt turmoil," CFS Working Paper Series 2012/13, Center for Financial Studies (CFS).

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