Cross-border Exposures and Financial Contagion
Hans Degryse, Muhammad Ather Elahi, Maria Fabiana Penas
International Review of Finance,
No. 2,
2010
Abstract
Integrated financial markets provide opportunities for expansion and improved risk sharing, but also pose threats of contagion risk through cross-border exposures. This paper examines cross-border contagion risk over the period 1999–2006. To that purpose we use aggregate cross-border exposures of 17 countries as reported in the Bank for International Settlements Consolidated Banking Statistics. We find that a shock that affects the liabilities of one country may undermine the stability of the entire financial system. Particularly, a shock wiping out 25% (35%) of US (UK) cross-border liabilities against non-US (non-UK) banks could lead to bank contagion eroding at least 94% (45%) of the recipient countries' banking assets. We also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Our simulations also reveal that the ‘speed of propagation of contagion’ has increased in recent years resulting in a higher number of directly exposed banking systems. Finally, we find that contagion is more widespread in geographical proximities.
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The Extreme Risk Problem for Monetary Policies of the Euro-Candidates
Hubert Gabrisch, Lucjan T. Orlowski
Abstract
We argue that monetary policies in euro-candidate countries should also aim at mitigating excessive instability of the key target and instrument variables of monetary policy during turbulent market periods. Our empirical tests show a significant degree of leptokurtosis, thus prevalence of tail-risks, in the conditional volatility series of such variables in the euro-candidate countries. Their central banks will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy to mitigate such extreme risks while steering their economies out of the crisis and through the euroconvergence process. Such policies provide flexibility that is not embedded in the Taylor-type instrument rules, or in the Maastricht convergence criteria.
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Deriving the Term Structure of Banking Crisis Risk with a Compound Option Approach: The Case of Kazakhstan
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Discussion paper, Series 2: Banking and financial studies, No. 01/2010,
No. 1,
2010
Abstract
We use a compound option-based structural credit risk model to infer a term structure of banking crisis risk from market data on bank stocks in daily frequency. Considering debt service payments with different maturities this term structure assigns a separate estimator for short- and long-term default risk to each maturity. Applying the Duan (1994) maximum likelihood approach, we find for Kazakhstan that the overall crisis probability was mainly driven by short-term risk, which increased from 25% in March 2007 to 80% in December 2008. Concurrently, the long-term default risk increased from 20% to only 25% during the same period.
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Bank Credit Standards, Demand, Pro-cyclicality and the Business Cycle: A Comment
Á. Maddaloni, J. L. Peydró Alcalde, J. Suárez, Reint E. Gropp
Moneda y crédito,
No. 230,
2010
Abstract
We analyze the determinants fo standards and demand for loans to firms and house-holds over the last business cycle using the comprehensive and confidential Bank Lending Survery from the Euro area. There is significant variation of standards and demand over the cycle. Standards for business loans vary more during the business cycle than the lending standards for households, whereas credit demand from households varies more than demand from firms. Lending standards vary mainly due to charges in perception of borrower risk, bank balance sheet positions and competitive pressures. In particular, we find that higher GDP growth softens lending standards for all loans, i. e. lending standards are pro-cyclical. However, we also find pro-cyclicality in credit demand.
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Margins of international banking: Is there a productivity pecking order in banking, too?
Claudia M. Buch
Bundesbank Discussion Paper 12/2009,
2009
Abstract
Modern trade theory emphasizes firm-level productivity differentials to explain
the cross-border activities of non-financial firms. This study tests whether a
productivity pecking order also determines international banking activities. Using
a novel dataset that contains all German banks’ international activities, we
estimate the ordered probability of a presence abroad (extensive margin) and the
volume of international assets (intensive margin). Methodologically, we enrich the
conventional Heckman selection model to account for the self-selection of banks
into different modes of foreign activities using an ordered probit. Four main
findings emerge. First, similar to results for non-financial firms, a productivity
pecking order drives bank internationalization. Second, only a few non-financial
firms engage in international trade, but many banks hold international assets, and
only a few large banks engage in foreign direct investment. Third, in addition to
productivity, risk factors matter for international banking. Fourth, gravity-type
variables have an important impact on international banking activities.
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Book Review on: Ahmed Bahagat, Fostering the use of Financial Risk Management Products in Developing Countries, 2002, Economic Research Papers No. 69, Abidjan: African Development Bank
Tobias Knedlik
African Development Perspectives Yearbook: Private and Public Sectors: Towards a Balance,
2004
Abstract
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The Identification of Technology Regimes in Banking: Implications for the Market Power-Fragility Nexus
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
No. 8,
2009
Abstract
Neglecting the existence of different technologies in banking can contaminate efficiency, market power, and other performance measures. By simultaneously estimating (i) technology regimes conditional on exogenous factors, (ii) efficiency conditional on risk management, and (iii) Lerner indices of German banks, we identify three distinct technology regimes: Public & Retail, Small & Specialized, and Universal & Relationship. System estimation at the regional level reveals that greater bank market power increases bank profitability but also fosters corporate defaults. Corporate defaults, in turn, lead to higher probabilities of bank distress, which supports the market power-fragility hypothesis.
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Stages of the 2007/2008 Global Financial Crisis: Is there a Wandering Asset Price Bubble?
Lucjan T. Orlowski
Economics E-Journal 43. Munich Personal RePEc Archive 2008,
2009
Abstract
This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble“. Unstable allocations elevate market, credit, and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.
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Parenting Benefit – A New Risk for Companies
Nicole Nulsch, Henry Dannenberg
Wirtschaft im Wandel,
No. 7,
2008
Abstract
Mit dem zum 1. Januar 2007 neu eingeführten Elterngeld verfolgt der Gesetzgeber unter anderem das Ziel, mehr Väter für eine Elternzeit zu begeistern. Bislang wurden die Auswirkungen des Elterngelds insbesondere aus familienpolitischer Perspektive betrachtet. Ziel dieses Beitrags ist es jedoch, die unternehmenspolitischen Folgen des Elterngelds zu untersuchen.
Die Entwicklung der Elterngeldanträge im Jahr 2007 deutet darauf hin, dass zunehmend mehr Väter von der Elternzeit Gebrauch machen. Dabei handelt es sich in mehr als der Hälfte der Fälle um berufstätige Väter. Konnten Unternehmen in der Vergangenheit das Risiko, dass eine wichtige Position im Unternehmen für einen längeren Zeitraum aufgrund der Geburt eines Kindes unbesetzt ist, verhältnismäßig einfach dadurch senken, indem ein Mann beschäftigt wurde, wird diese Strategie in Zukunft an Bedeutung verlieren. Es ist zu erwarten, dass dieses veränderte Risikoumfeld einerseits die Karrierechancen der Frauen verbessern und zu einer Verringerung der Lohnlücke zwischen den Geschlechtern beitragen kann. Es ist jedoch auch zu erwarten, dass sich die Risikosituation der Unternehmen insgesamt verschlechtert und bei gegebener Risikotragfähigkeit bisher tragbare Risiken zukünftig nicht mehr eingegangen werden können, was sich negativ auf die wirtschaftliche Entwicklung auswirken könnte.
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Do Weak Supervisory Systems Encourage Bank Risk-taking?
Claudia M. Buch, G. DeLong
Journal of Financial Stability,
2008
Abstract
Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.
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