From Sovereigns to Banks: Evidence on Cross-border Contagion (2006-2011)
AbstractThis paper analyzes the evolution of the banking system sensitivity to cross-border contagion over the period of 2006-2011. The study is performed on the basis of the BIS data on crossborder exposures and the Bankscope data on Tier 1 capital of 20 banking systems (Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey, the UK and the US). Since the European sovereign debt crisis took a decisive turn at the end of 2009, markets started looking at its main protagonists - so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) - with a lot of anxiety. However, unexpectedly, the analysis of the data shows that a single failure among PIIGS could be absorbed by the network in 2011. Nevertheless, multiple initial failures (especially combinations including Italy and/or Spain) could be more dangerous. The simulation results reveal that the resilience of banking systems to contagion risks tends to improve over the years. The most systemically important countries are those of the US, the UK, France and Germany. Besides, a shock to the US is capable of destroying the UK banking system already in the ?rst round, whereas the UK would not lead to the failure of the US banking system even after all rounds of contagion. The results also show that the banking systems of the US, Turkey and Finland are completely immune to contagion effects. At the same time, there exist considerable risks for Switzerland and Ireland as their banking systems default also with high recovery rates.
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Bibliographic InfoPaper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 680.
Date of creation: Aug 2013
Date of revision:
contagion; Furfine algorithm; stress testing; PIIGS;
Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-09-06 (Accounting & Auditing)
- NEP-ALL-2013-09-06 (All new papers)
- NEP-BAN-2013-09-06 (Banking)
- NEP-CBA-2013-09-06 (Central Banking)
- NEP-HME-2013-09-06 (Heterodox Microeconomics)
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