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Ailing Mothers, Healthy Daughters? Contagion in the Central European Banking Sector

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  • Tomas Fiala

    ()

  • Tomas Havranek

Abstract

Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign mother bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze inter- dependencies in downward risk in the banking sector of the Czech Republic, Hungary, Poland, and Slovakia during 1994-2013. In contrast to the pre- sumptions of the current regulatory policy of these countries, we find that the risk of contagion from a foreign mother bank to its local subsidiary is substantially smaller than the risk between two local banks.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp1069.

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Length: pages
Date of creation: 01 Jan 2014
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Handle: RePEc:wdi:papers:2014-1069

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Keywords: systemic risk; extreme value theory; financial stability; Central Eastern Europe; banking; parent-subsidiary relationship;

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