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International Propagation of the Credit Crisis

51 Pages Posted: 21 Nov 2010 Last revised: 29 Mar 2012

Richard A. Brealey

London Business School

Ian A. Cooper

London Business School

Evi Kaplanis

London Business School

Date Written: April 30, 2011

Abstract

We use a large sample of non-US banks to examine the propagation of the 2007-2009 crisis. Using both stock market and structural variables we test whether the relative incidence of the crisis was better explained by crisis models or by the VaR-type analysis of the Basel system. Consistent with crisis models, we find that comovement, interbank linkages, leverage, and fragility of funding structure are related to crisis impact. Contrary to the assumptions of the Basel system, we find that asset risk, measured by the risk weightings of the Basel, has a perverse relationship with crisis impact when considered alone and no relationship when other variables are included. We provide evidence of both a direct linkage between banks and an indirect linkage which could either represent linkages in the real economy or common demands by investors for liquidity. We also investigate whether the relative impact of the crisis on banks was related to a shift in correlations and find that it was not. We discuss the implications of our findings for regulation.

Keywords: banking, financial institutions, capital structure, risk management, international finance, monetary economics, credit crisis, international transmission, contagion, financial regulation

JEL Classification: F33, F36, G1, G15, G18, G21, G28, G32, G34

Suggested Citation

Brealey, Richard A. and Cooper, Ian A. and Kaplanis, Evi, International Propagation of the Credit Crisis (April 30, 2011). Available at SSRN: https://ssrn.com/abstract=1712707 or http://dx.doi.org/10.2139/ssrn.1712707

Richard A. Brealey

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Evi Kaplanis

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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