Cross-Border Bank Contagion in Europe

57 Pages Posted: 2 Aug 2006

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Marco Lo Duca

European Central Bank (ECB)

Jukka M. Vesala

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA)

Date Written: July 2006

Abstract

This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (coexceedances) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.

Keywords: Banking, Contagion, Distance to default, Multinomial logit model

JEL Classification: G21, F36, G15

Suggested Citation

Gropp, Reint and Lo Duca, Marco and Vesala, Jukka, Cross-Border Bank Contagion in Europe (July 2006). ECB Working Paper No. 662, Available at SSRN: https://ssrn.com/abstract=916097 or http://dx.doi.org/10.2139/ssrn.916097

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Marco Lo Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jukka Vesala

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA) ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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