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Abstract
We use the extreme value theory framework to analyze spillover risk across the international banking system. We test for the likelihood that an extreme shock affecting a major, systemic global bank would affect another large local or foreign counterpart, and vice versa. Our results reveal several key trends among major global banks: spillover 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 global financial stability especially during stressful periods. Not surprisingly, our findings also suggest that bank spillover risk has risen over time, which emphasizes the need for continuing collaboration on cross-border supervision and crisis management.
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