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

 
Author/Editor: Chan-Lau, Jorge A. ; Mitra, Srobona ; Ong, Li L.
 
Publication Date: April 01, 2007
 
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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: 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. 07/74
Subject(s): Bank soundness | International banking | Economic models | United Kingdom

Author's Keyword(s): Bank soundness | co-exceedance | contagion risk | distance-to-default | extreme value theory | LOGIT
 
English
Publication Date: April 01, 2007
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2007074 Pages: 46
Price:
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