Testing for East-West Contagion in the European Banking Sector During the Financial Crisis

41 Pages Posted: 9 May 2011

Date Written: February 15, 2011

Abstract

Large and growing international financial linkages between East and West have altered the nature of the stability risks faced by European banking systems, increasing susceptibility to contagion. This paper aims to identify potential risks of cross-border contagion using a sample of large Western and Eastern European banks. We assume that contagion risk is associated with extreme co-movements in a market-based measure of bank soundness, controlling for common underlying factors. We also find evidence that contagion risk across European banks heightened significantly during the recent crisis. Contagion among Western European banks with the highest market share in Eastern Europe and from this group to Eastern European banks shows the largest increase in our sample. We find also evidence of contagion spreading from Eastern European banks, but this effect seems to reflect a broader phenomenon of contagion from emerging markets to banks in advanced countries exposed to these markets. Finally, our findings offer only mixed evidence of the existence of a direct ownership channel in the transmission of contagion.

Keywords: banking contagion, distance to default, testing hypothesis, logit model

JEL Classification: C12, G15, G21

Suggested Citation

Cocozza, Emidio and Piselli, Paolo, Testing for East-West Contagion in the European Banking Sector During the Financial Crisis (February 15, 2011). Bank of Italy Temi di Discussione (Working Paper) No. 790, Available at SSRN: https://ssrn.com/abstract=1829991 or http://dx.doi.org/10.2139/ssrn.1829991

Emidio Cocozza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paolo Piselli (Contact Author)

Bank of Italy ( email )

Via Milano, 64
00184 Rome
Italy

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