Contagion Risk in the Australian Banking and Property Sectors
22nd Australasian Finance and Banking Conference 2009
41 Pages Posted: 25 Aug 2009 Last revised: 11 Feb 2011
Date Written: March 4, 2010
The Australian banking system has emerged from the global crisis virtually unhurt, with most banks still profitable, adequately capitalized, and with AA credit ratings. Are there any risks or vulnerabilities in this success story? This paper looks at systemic banking risk or contagion risk in Australia and attempts to determine if this risk has increased with the recent global crisis as well as whether the risk is related to the downturn experienced in the real estate market. We employ Extreme Value Theory to measure univariate Value at Risk, as well as multivariate intra-sector and inter-sector contagion risks. Of the 13 sectors analyzed, we find that the property sector exhibits the highest level of extremal dependence with the banking sector. Further, the credit crisis has significantly increased the probability of a bank or property firm crashing. Moreover, contagion risks have increased significantly not only within the banking and property sectors, but also between them.
Keywords: Contagion Risk, Extreme Value Theory, Banks, Australia
JEL Classification: C14, G01, G15, G21
Suggested Citation: Suggested Citation