Contagion Risk in the International Banking System and Implications for London as a Global Financial Center

48 Pages Posted: 12 Apr 2007

See all articles by Li Ong

Li Ong

International Monetary Fund (IMF)

Srobona Mitra

International Monetary Fund (IMF)

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department; National University of Singapore (NUS) - Risk Management Institute; Tufts University - Fletcher School of Law and Diplomacy

Date Written: April 2007

Abstract

In this paper, we use the extreme value theory (EVT) framework to analyze contagion risk across the international banking system. We test for the likelihood that an extreme shock affecting a major, systemic U.K. bank would also affect another large local or foreign counterpart, and vice-versa. Our results reveal several key trends among major global banks: contagion risk among banks exhibits "home bias" individual banks are affected differently by idiosyncratic shocks to their major counterparts; and banks are affected differently by common shocks to the real economy or financial markets. In general, bank soundness appears more susceptible to common (macro and market) shocks when the global environment is turbulent; this may have important implications for London as a major financial services and capital markets hub.

Keywords: bank soundness, co-exceedance, contagion risk, distance-to-default, extreme

JEL Classification: C51, G21

Suggested Citation

Ong, Li and Mitra, Srobona and Chan-Lau, Jorge Antonio, Contagion Risk in the International Banking System and Implications for London as a Global Financial Center (April 2007). IMF Working Papers, Vol. , pp. 1-46, 2007. Available at SSRN: https://ssrn.com/abstract=979028

Li Ong (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Srobona Mitra

International Monetary Fund (IMF) ( email )

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

Jorge Antonio Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Tufts University - Fletcher School of Law and Diplomacy ( email )

160 Packard Ave
Medford, MA 02155
United States

HOME PAGE: http://fletcher.tufts.edu/ceme/index.shtml

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