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On the importance of indirect banking vulnerabilities in the Eurozone

  • Bicu Andreea
  • Candelon Bertrand


This paper investigates banking and sovereign distress in the Eurozone and the importance ofdirect and indirect fi nancial exposures. We use BIS cross-border direct banking flows to linkmember states in a GVAR framework and jointly model sectoral CDS premia. Based on balance sheetpositions of an intermediate debtor country, we calculate indirect exposures and asses how thelevel of interconnectedness is impacted when indirect links are accounted for. We notice a generalslowdown in fi nancial integration and a reduction in cross-border assets in the hope of limitinginternational contagion. By diff erentiating between direct and indirect links, we show that theimpact of reduced weights on core member states is insigni ficant and that deleveraging strategiesare not able to successfully reduce risk.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 033.

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Date of creation: 2012
Date of revision:
Handle: RePEc:unm:umamet:2012033
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