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Contagion Risk in the International Banking System and Implications for London As a Global Financial Center
Author:
Mr. Jorge A Chan-Lau
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,
Ms. Srobona Mitra
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Ms. Li L Ong
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Series:
IMF Working Papers
Volume/Issue:
Volume 2007: Issue 074
Language:
English
Publication Date:
01 Apr 2007
DOI:
https://doi.org/10.5089/9781451866384.001
ISBN:
9781451866384
ISSN:
1018-5941
Pages:
46
Keywords:
WP; bank; HSBC Holdings; Société Générale; U.K. bank; bank soundness; co-exceedance; contagion risk; distance-to-default; extreme value theory; LOGIT; idiosyncratic shock; banks resident; BNP Paribas; cross-border bank lending; bank transmission channels; Foreign banks; Commercial banks; Financial sector; Stock markets; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund