The Bright and the Dark Side of Cross-Border Banking Linkages
Electronic Access:
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Summary:
When a country's banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country's banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.
Series:
Working Paper No. 2011/186
Subject:
Bank soundness Banking Banking crises Commercial banks Financial contagion Financial crises Financial institutions Financial sector policy and analysis Financial sector stability
English
Publication Date:
August 1, 2011
ISBN/ISSN:
9781462309269/1018-5941
Stock No:
WPIEA2011186
Pages:
51
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