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Testing for East-West contagion in the European banking sector during the financial crisis

Author

Listed:
  • Emidio Cocozza

    () (Bank of Italy)

  • Paolo Piselli

    () (Bank of Italy)

Abstract

Large and growing international financial linkages between East and West have altered the nature of the stability risks faced by European banking systems, increasing susceptibility to contagion. This paper aims to identify potential risks of cross-border contagion using a sample of large Western and Eastern European banks. We assume that contagion risk is associated with extreme co-movements in a market-based measure of bank soundness, controlling for common underlying factors. We also find evidence that contagion risk across European banks heightened significantly during the recent crisis. Contagion among Western European banks with the highest market share in Eastern Europe and from this group to Eastern European banks shows the largest increase in our sample. We find also evidence of contagion spreading from Eastern European banks, but this effect seems to reflect a broader phenomenon of contagion from emerging markets to banks in advanced countries exposed to these markets. Finally, our findings offer only mixed evidence of the existence of a direct ownership channel in the transmission of contagion.

Suggested Citation

  • Emidio Cocozza & Paolo Piselli, 2011. "Testing for East-West contagion in the European banking sector during the financial crisis," Temi di discussione (Economic working papers) 790, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_790_11
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2011/2011-0790/en_tema_790.pdf
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    References listed on IDEAS

    as
    1. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    2. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    3. Jorge A Chan-Lau & Srobona Mitra & Li L Ong, 2007. "Contagion Risk in the International Banking System and Implications for London As a Global Financial Center," IMF Working Papers 07/74, International Monetary Fund.
    4. Arnaud Jobert & Janet Kong & Jorge A Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
    5. International Monetary Fund, 2000. "Spillovers Through Banking Centers; A Panel Data Analysis," IMF Working Papers 00/88, International Monetary Fund.
    6. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Renée Fry-McKibbin & Cody Hsiao & Chrismin Tang, 2014. "Contagion and Global Financial Crises: Lessons from Nine Crisis Episodes," Open Economies Review, Springer, vol. 25(3), pages 521-570, July.
    2. TRENCA Ioan & PETRIA Nicolae & DEZSI Eva, 2014. "Linkages Between The Stock Markets Of Eastern Europe," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 66(1), pages 91-104.
    3. Kyriakos C. Neanidis & Christos S. Savva, 2015. "Is Loan Dollarization Contagious across Countries? Evidence from Transition Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 200, Economics, The Univeristy of Manchester.
    4. Beltratti, Andrea & Stulz, Rene M., 2015. "Bank Sovereign Bond Holdings, Sovereign Shock Spillovers, and Moral Hazard durning the European Crisis," Working Paper Series 2015-06, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    5. Trenca Ioan & Petria Nicolae & Corovei Emilia, 2015. "Idiosyncratic Risk And Systemic Risk In The European Banking System," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 912-919, July.

    More about this item

    Keywords

    banking contagion; distance to default; testing hypothesis; logit model;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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