The Bright and the Dark Side of Cross-Border Banking Linkages

42 Pages Posted: 16 Aug 2011

See all articles by Martin Čihák

Martin Čihák

International Monetary Fund (IMF)

Ryan Scuzzarella

affiliation not provided to SSRN

Sònia Muñoz

International Monetary Fund (IMF)

Date Written: August 2011

Abstract

When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.

Suggested Citation

Cihak, Martin and Scuzzarella, Ryan and Muñoz, Sònia, The Bright and the Dark Side of Cross-Border Banking Linkages (August 2011). IMF Working Papers, Vol. , pp. 1-41, 2011. Available at SSRN: https://ssrn.com/abstract=1910489

Martin Cihak (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Ryan Scuzzarella

affiliation not provided to SSRN ( email )

Sònia Muñoz

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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