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

By Jorge A Chan-Lau, Srobona Mitra, Li L Ong

April 1, 2007

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Jorge A Chan-Lau, Srobona Mitra, and Li L Ong. Contagion Risk in the International Banking System and Implications for London As a Global Financial Center, (USA: International Monetary Fund, 2007) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bank soundness, Banking, Commercial banks, Economic sectors, Financial institutions, Financial markets, Financial sector, Financial sector policy and analysis, Foreign banks, Stock markets

Keywords: Bank, Bank soundness, Bank transmission channels, Banks resident, BNP Paribas, Co-exceedance, Commercial banks, Contagion risk, Cross-border bank lending, Distance-to-default, Extreme value theory, Financial sector, Foreign banks, Global, HSBC Holdings, Idiosyncratic shock, LOGIT, Société Générale, Stock markets, U.K. bank, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/074
Stock No:

WPIEA2007074
ISBN:

9781451866384
ISSN:

1018-5941

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