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The Bright and the Dark Side of Cross-Border Banking Linkages

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Abstract

When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between the stability and the interconnectedness of a country’s banking sector. For banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis, but once the interconnectedness reaches a certain value, further increases in interconnectedness can increase the crisis probability. Interestingly, it matters whether the linkages are primarily in terms of the banks’ assets or liabilities, with the relationship between interconnectedness and crisis probability being stronger for liabilities. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but only up to a point.

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  • Martin Cihak & Sonia Munoz & Ryan Scuzzarella, 2012. "The Bright and the Dark Side of Cross-Border Banking Linkages," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 200-225, July.
  • Handle: RePEc:fau:fauart:v:62:y:2012:i:3:p:200-225
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    Cited by:

    1. Barth, James R. & Caprio, Gerard, Jr. & Levine, Ross, 2012. "The evolution and impact of bank regulations," Policy Research Working Paper Series 6288, The World Bank.
    2. Cussen, Mary, 2017. "Identifying Inter-Sectoral Exposures in Ireland using Network Analysis," Economic Letters 03/EL/17, Central Bank of Ireland.
    3. Giampaolo Gabbi & Alesia Kalbaska & Alessandro Vercelli, 2014. "Factors generating and transmitting the financial crisis: The role of incentives: securitization and contagion," Working papers wpaper56, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    4. David Amaglobeli & Nicolas End & Mariusz Jarmuzek & Geremia Palomba, 2015. "From Systemic Banking Crises to Fiscal Costs; Risk Factors," IMF Working Papers 15/166, International Monetary Fund.
    5. Garratt, Rodney J. & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2014. "The great entanglement: The contagious capacity of the international banking network just before the 2008 crisis," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 367-385.
    6. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
    7. Kyunghun Kim & Srobona Mitra, 2014. "Real and Financial Vulnerabilities from Crossborder Banking Linkages," IMF Working Papers 14/136, International Monetary Fund.

    More about this item

    Keywords

    banking stability; interconnectedness; network analysis; banking crises;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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