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From Sovereigns to Banks: Evidence on Cross-border Contagion (2006-2011)

  • Alesia Kalbaska

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    This paper analyzes the evolution of the banking system sensitivity to cross-border contagion over the period of 2006-2011. The study is performed on the basis of the BIS data on crossborder exposures and the Bankscope data on Tier 1 capital of 20 banking systems (Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey, the UK and the US). Since the European sovereign debt crisis took a decisive turn at the end of 2009, markets started looking at its main protagonists - so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) - with a lot of anxiety. However, unexpectedly, the analysis of the data shows that a single failure among PIIGS could be absorbed by the network in 2011. Nevertheless, multiple initial failures (especially combinations including Italy and/or Spain) could be more dangerous. The simulation results reveal that the resilience of banking systems to contagion risks tends to improve over the years. The most systemically important countries are those of the US, the UK, France and Germany. Besides, a shock to the US is capable of destroying the UK banking system already in the ?rst round, whereas the UK would not lead to the failure of the US banking system even after all rounds of contagion. The results also show that the banking systems of the US, Turkey and Finland are completely immune to contagion effects. At the same time, there exist considerable risks for Switzerland and Ireland as their banking systems default also with high recovery rates.

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    File URL: http://www.econ-pol.unisi.it/quaderni/680.pdf
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    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 680.

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    Date of creation: Aug 2013
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    Handle: RePEc:usi:wpaper:680
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    1. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
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    14. repec:dgr:kubcen:200920 is not listed on IDEAS
    15. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
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