Crisis Transmission in the Global Banking Network

Author/Editor:

Galina Hale ; Tümer Kapan ; Camelia Minoiu

Publication Date:

April 12, 2016

Electronic Access:

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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:

We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks' profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks' supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.

Series:

Working Paper No. 2016/091

Subject:

Bank credit Banking Banking crises Financial crises Financial institutions Foreign currency exposure Loans Money Syndicated loans Systemic crises

English

Publication Date:

April 12, 2016

ISBN/ISSN:

9781475551341/1018-5941

Stock No:

WPIEA2016091

Pages:

38

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