IMF Working Papers

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

Author/Editor:

Jorge A Chan-Lau ; Srobona Mitra ; Li L Ong

Publication Date:

April 1, 2007

Electronic Access:

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

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.

Series:

Working Paper No. 2007/074

Subject:

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

Frequency:

Monthly