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The sources of contagion risk in a banking sector with foreign ownership

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  • Fiala, Tomas
  • Havranek, Tomas

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 parent bank and its local subsidiary. During and after the global financial crisis, the second source of risk has been stressed by local regulators. Using a nonparametric method based on extreme value theory, we analyze interdependencies in downward risk in the banking sectors of the Czech Republic, Poland, Slovakia, and Turkey during 1994–2013. We find that the risk of contagion from a foreign parent bank to its local subsidiary is substantially smaller than the risk between two local banks.

Suggested Citation

  • Fiala, Tomas & Havranek, Tomas, 2017. "The sources of contagion risk in a banking sector with foreign ownership," Economic Modelling, Elsevier, vol. 60(C), pages 108-121.
    • Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:108-121
    DOI: 10.1016/j.econmod.2016.08.025
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    2. Alin Marius Andrieş & Simona Nistor, 2018. "Systemic Risk and Foreign Currency Positions of Banks: Evidence from Emerging Europe," Eastern European Economics, Taylor & Francis Journals, vol. 56(5), pages 382-421, September.
    3. Ionut – Daniel Pop, 2019. "Systemic Sustainability of European Banking Activity: A Multi-Perspective Approach," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 49-58, July.
    4. Linhai Zhao & Yingjie Li & Yenchun Jim Wu, 2022. "An Identification Algorithm of Systemically Important Financial Institutions Based on Adjacency Information Entropy," Computational Economics, Springer;Society for Computational Economics, vol. 59(4), pages 1735-1753, April.
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    6. Do Thi Hai Yen & David Han-Min Wang, 2023. "Foreign Ownership and Corporate Governance on Firm Risk in ASEAN Countries: In the Context of the US-China Trade War," Springer Books, in: An Thinh Nguyen & Thu Thuy Pham & Joon Song & Yen-Ling Lin & Manh Cuong Dong (ed.), Contemporary Economic Issues in Asian Countries: Proceeding of CEIAC 2022, Volume 1, pages 497-510, Springer.
    7. repec:cnb:ocpubv:rb15/1 is not listed on IDEAS
    8. Carmela D’Avino, 2020. "Global Banking and Macroprudential Policy: New Evidence on U.S. Banks," Journal of Economic Issues, Taylor & Francis Journals, vol. 54(4), pages 1095-1121, October.
    9. repec:cnb:ocpubv:rb14/2 is not listed on IDEAS
    10. Mirza, Harun & Moccero, Diego & Palligkinis, Spyros & Pancaro, Cosimo, 2020. "Fire sales by euro area banks and funds: What is their asset price impact?," Economic Modelling, Elsevier, vol. 93(C), pages 430-444.
    11. Mezei, József & Sarlin, Peter, 2018. "RiskRank: Measuring interconnected risk," Economic Modelling, Elsevier, vol. 68(C), pages 41-50.
    12. repec:cnb:ocpubv:rb15/2 is not listed on IDEAS
    13. Yao, Yanzhen & Li, Jianping & Zhu, Xiaoqian & Wei, Lu, 2017. "Expected default based score for identifying systemically important banks," Economic Modelling, Elsevier, vol. 64(C), pages 589-600.
    14. Naufa, Ahmad Maulin & Lantara, I Wayan Nuka & Lau, Wee-Yeap, 2019. "The impact of foreign ownership on return volatility, volume, and stock risks: Evidence from ASEAN countries," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 221-235.
    15. repec:cnb:ocpubv:rb16/2 is not listed on IDEAS
    16. Jarko Fidrmuc & Svatopluk Kapounek, 2020. "The Risks and Financial Vulnerability of Foreign Bank Ownership in CEECs: Evidence from Exchange Rate Depreciation after the Financial Crisis," Eastern European Economics, Taylor & Francis Journals, vol. 58(1), pages 34-48, January.
    17. Atasoy, Burak Sencer & Özkan, İbrahim & Erden, Lütfi, 2024. "The determinants of systemic risk contagion," Economic Modelling, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Systemic risk; Extreme value theory; Financial stability; Central and Eastern Europe; Banking; Parent–subsidiary relationship;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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