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Financial connectivity and excessive liquidity: Benefit or risk?

Müge Demir and Zeynep Önder

Journal of International Financial Markets, Institutions and Money, 2019, vol. 62, issue C, 203-221

Abstract: This paper explores the structure of cross-border lending market by using network analysis and examines the relationship between financial connectivity and probability of systemic crises during normal, credit boom and capital inflow upsurge periods, controlling for macroeconomic variables. A country-level panel data set for bank-to-bank and bank-to-non-bank cross-border lending markets of 13 advanced economies is used in the analysis for the 1978–2016 period. We find that a rise in financial connectivity reduces the probability of systemic crises. However, this effect is found to be mitigated or completely eliminated in credit boom and capital inflow upsurge periods in both markets. The findings suggest that bank-to-non-bank lending market is more stable in terms of both the number and the amount of lending relationships and recovered faster than bank-to-bank lending market following the recent global financial crisis.

Keywords: Cross-border banking; Network analysis; Financial connectivity; Systemic crises (search for similar items in EconPapers)
JEL-codes: F21 F34 F65 G01 G19 (search for similar items in EconPapers)
Date: 2019
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