Cross-Border Exposures and Financial Contagion

39 Pages Posted: 19 Mar 2009 Last revised: 6 Jul 2009

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

M.A. Elahi

CentER, European Banking Center (EBC), Tilburg University

María Fabiana Penas

Universidad Torcuato Di Tella

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Date Written: March 19, 2009

Abstract

Integrated financial markets provide opportunities for expansion and improved risk sharing, but also pose threats of contagion risk through cross-border exposures. This paper examines cross-border contagion risk over the period 1999-2006. To that purpose we use aggregate cross-border exposures of seventeen countries as reported in the BIS Consolidated Banking Statistics. We find that a shock which affects the liabilities of one country may undermine the stability of the entire financial system. Particularly, a shock wiping out 25% (35%) of US (UK) cross-border liabilities against non-US (non-UK) banks could lead to bank contagion eroding at least 94% (45%) of the recipient countries' banking assets. We also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Our simulations also reveal that the "speed of propagation of contagion" has increased in recent years resulting in a higher number of directly exposed banking systems. Finally we find that contagion is more widespread in geographical proximities.

Keywords: Cross-border contagion, financial integration, financial stability

JEL Classification: G15, G20, G29

Suggested Citation

Degryse, Hans and Ather Elahi, Muhammad and Penas, María Fabiana, Cross-Border Exposures and Financial Contagion (March 19, 2009). TILEC Discussion Paper No. 2009-008. Available at SSRN: https://ssrn.com/abstract=1365115 or http://dx.doi.org/10.2139/ssrn.1365115

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Muhammad Ather Elahi

CentER, European Banking Center (EBC), Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

María Fabiana Penas

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

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