Cross-Border Exposures and Financial Contagion

32 Pages Posted: 4 Jun 2010

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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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 17 countries as reported in the Bank for International Settlements Consolidated Banking Statistics. We find that a shock that 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.

Suggested Citation

Degryse, Hans and Ather Elahi, Muhammad and Penas, María Fabiana, Cross-Border Exposures and Financial Contagion. International Review of Finance, Vol. 10, No. 2, pp. 209-240, June 2010. Available at SSRN: https://ssrn.com/abstract=1611976 or http://dx.doi.org/10.1111/j.1468-2443.2010.01109.x

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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