International Propagation of the Credit Crisis
49 Pages Posted: 23 Mar 2012
Date Written: February 2012
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, fragility of funding structure, and leverage are related to relative crisis impact. Contrary to the assumptions of the Basel system, we find that asset risk, measured by either the risk weightings of the Basel system or individual bank volatility, has a perverse relationship with crisis impact when considered alone and no relationship when other variables are included. We also investigate whether the relative impact of the crisis on banks was caused by contagion 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
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