The Bright and the Dark Side of Cross-Border Banking Linkages

Author/Editor:

Sònia Muñoz ; Ryan Scuzzarella ; Martin Cihak

Publication Date:

August 1, 2011

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

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:

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. 11/186

Subject:

English

Publication Date:

August 1, 2011

ISBN/ISSN:

9781462309269/1018-5941

Stock No:

WPIEA2011186

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

51

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