Financial Contagion: Bank Characteristics Matter

Abstract

We systematically examine how bank characteristics are related to a bank’s financial contagion exposure. Examining capital requirements, we find evidence that while tier 1 capital requirements are negatively related to a bank’s contagion exposure, the sum of tier 1 and tier 2 capital ratios are positively related to it. Banks with greater financial constraints are less exposed to contagion. Geographic distance between banks is negatively related to contagion exposures and we find evidence that institutional ownership is positively related to banks’ contagion exposures. Finally, we find that board attributes that reduce banks’ risk taking incentives negatively associate with financial contagion.

Keywords: Financial Contagion, Systemic Risk, Corporate Finance, Corporate Governance

JEL Classification: G21, G30