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The contagious capacity of the international banking network: 1985-2009

  • Garratt, Rodney
  • Mahadeva, Lavan
  • Svirydzenka, Katsiaryna

Systemic risk among the network of international banking groups arises when financial stress threatens to crisscross many national boundaries and expose imperfect international coordination. To assess this risk, we use Rosvall and Bergstrom’s (PNAS, 2008, 1118-1123) information theoretic map equation to partition banking groups from 21 countries into modules. We consider a quarter of a century of data on the cross-border interbank market. We show that in the late 1980s four important financial centres formed one large super cluster that was highly contagious in terms of transmission of stress within its ranks, but less contagious on a global scale. But the expansion leading to the 2008 crisis left more transmitting hubs sharing the same total influence as a few large modules had previously. We show that this greater entanglement meant the network was more broadly contagious, and not that risk was more shared. Thus, our analysis contributes to our understanding as to why defaults in US sub-prime mortgages spread quickly through the network.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt0r89f16p.

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Date of creation: 16 Oct 2011
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Handle: RePEc:cdl:ucsbec:qt0r89f16p
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  1. Manmohan Singh & Miguel A. Segoviano Basurto, 2008. "Counterparty Risk in the Over-The-Counter Derivatives Market," IMF Working Papers 08/258, International Monetary Fund.
  2. Haldane, Andrew G. & Penalver, Adrian & Saporta, Victoria & Shin, Hyun Song, 2005. "Analytics of sovereign debt restructuring," Journal of International Economics, Elsevier, vol. 65(2), pages 315-333, March.
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  8. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
  9. Giorgio Fagiolo & Javier Reyes & Stefano Schiavo, 2007. "International Trade and Financial Integration: A Weighted Network Analysis," LEM Papers Series 2007/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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  13. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
  14. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
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