Abstract

Increasing financial integration makes the assessment of cross-country linkages crucial for effective financial surveillance. This study estimates contagion risk between large Irish banks and European and U.S. banks during 1994–2005, using distance-to-default measures and the methodology of extreme value theory. Employing an ordered logit model and controlling for Ireland-specific and global shocks, we find evidence of significant contagion risk coming from the United Kingdom, the United States, and the Netherlands toward Ireland. We also find that patterns of contagion to Irish banks have shifted over time, coming from the United Kingdom in the pre-euro period and from the United States in the post-2001 period.

Contributor Notes

This chapter was previously published in IMF Staf Papers (2009), Vol. 56, No. 4, pp. 758–86 (Duggar and Mitra, 2009). It was prepared in the context of the 2006 Financial Sector Assessment Program Update on Ireland. The authors would like to thank Arabinda Basistha, Martin Čihák, Salim Darbar, James Morsink, Mark O’Brien, and Mark Swinburne for very useful comments and Marianne El-Khoury and Kiran Sastry for excellent research assistance. The authors would especially like to thank staf of the Irish Central Bank and the Financial Regulator for very useful discussions and data.
Author: Ms. Li L Ong