External Linkages and Contagion Risk in Irish Banks

IMF Working Papers, February 1, 2007

Source details

Title: External Linkages and Contagion Risk in Irish Banks
Authors: Srobona Mitra, Elena H Duggar
Publication date: February 1, 2007
Series: Working Paper No. 2007/044
Issue: 044
Volume: 2007
Pages: 38
DOI: https://doi.org/10.5089/9781451866087.001
Stock No: WPIEA2007044
ISBN: 9781451866087
ISSN: 1018-5941
Summary statement: The large and growing international linkages of big Irish banks expose them to idiosyncratic shocks arising in other countries.

Data coverage:
- Daily observations from January 1994 to November 2005.
Key metric:
- Distance to default (DD) data constructed from the banks' equity prices.
Empirical approaches:
- Rolling correlations between DDs of Irish banks and DDs of banks from other European countries and the U.S. to analyze trends in cross-country interdependencies.
- Multinomial logit model to estimate the number of banks in Ireland that experience a large shock on the same day as banks in other countries ("coexceedances"), controlling for Ireland-specific and global factors.

Evidence of increasing cross-border interdependencies over time.
Differing interlinkage patterns across distinct periods:
- Pre-Euro period
- Post-Euro period
- Post-September 11th period
Significant cross-border contagion risk identified from:
- United Kingdom
- United States
- Netherlands

Large and growing international linkages of big Irish banks increase exposure to idiosyncratic shocks originating abroad.
Monitoring and analysis of DD-based coexceedances can help identify periods and countries posing heightened contagion risk.
Differences in interlinkage patterns across structural breaks (Euro adoption, September 11th) suggest policy frameworks should account for regime shifts in international financial linkages.

Source: IMF Working Paper "External Linkages and Contagion Risk in Irish Banks" by Srobona Mitra and Elena H Duggar (February 1, 2007).