Cross-Border Lending and the International Transmission of Banking Crises

Freie Universität Berlin School of Business & Economics Discussion Paper No. 2020/13

57 Pages Posted: 12 Aug 2020

Date Written: July 09, 2020

Abstract

This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital flows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.

Keywords: Cross-border bank lending, banking crises, systemic risk, financial linkages

JEL Classification: C53, E44, F34, G01, G21

Suggested Citation

Dieckelmann, Daniel, Cross-Border Lending and the International Transmission of Banking Crises (July 09, 2020). Freie Universität Berlin School of Business & Economics Discussion Paper No. 2020/13, Available at SSRN: https://ssrn.com/abstract=3650149 or http://dx.doi.org/10.2139/ssrn.3650149

Daniel Dieckelmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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