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The Role of the Banking System in the International Transmission of Shocks

  • Massimo Sbracia

    ()

    (Banca d'Italia)

  • Andrea Zaghini

    ()

    (Banca d'Italia)

The paper analyzes the role of the banking system in the international transmission of financial shocks. A channel of transmission is defined as a mechanism through which a financial crisis in one country brings about a financial crisis in another country. Channels involving the banking sector operate through changes in the value of collateral and capital adequacy ratios, through bank runs and bank panics, and through moral hazard. Some stylized facts related to these channels are presented. In particular, the importance of the exposure to a common source of funding and the irrelevance of bank runs as causes of financial distress and contagion are also confirmed by many recent empirical studies. By contrast, according to empirical analyses, the presence of public guarantees as a source of vulnerability to financial shocks is still very controversial. Hence, vulnerability to the common lender channel during the Mexican, Asian and Russian crises is assessed. The indexes proposed in the paper show that the risks stemming from this channel have sharply declined in the years following each crisis for almost all the countries in our sample.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 409.

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Date of creation: Jun 2001
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Handle: RePEc:bdi:wptemi:td_409_01
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  12. Miller, Victoria, 1998. "The Double Drain with a Cross-Border Twist: More on the Relationship between Banking and Currency Crises," American Economic Review, American Economic Association, vol. 88(2), pages 439-43, May.
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  14. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
  15. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  16. Mariassunta Giannetti, 2000. "Banking System, International Investors and Central Bank Policy in Emerging Markets," Temi di discussione (Economic working papers) 369, Bank of Italy, Economic Research and International Relations Area.
  17. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  18. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  19. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
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  21. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
  22. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises ; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
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  24. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
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  27. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know before Running a Test," Temi di discussione (Economic working papers) 408, Bank of Italy, Economic Research and International Relations Area.
  28. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
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