Contagion risk in global banking sector

Kevin Daly, Jonathan Batten, Anil Mishra () and Tonmoy Choudhury

Journal of International Financial Markets, Institutions and Money, 2019, vol. 63, issue C

Abstract: This paper investigates contagion risk for the global banking environment using three different distance to risk measures (distance to default, distance to capital, and distance to insolvency). The timeframe for this research covers a period that is characterized by substantial financial innovation in regards to regulatory, monetary and technological change experienced in the banking environment. Our hypothesis is that volatility in the banking structure of a particular country upsurges the prospect of financial volatility in another. We model extreme shocks for banks by replicating four separate conditions of financial stress. We compute the probability of these states moving from one country′s banking system to another by employing multinomial logistic model. In total, we investigate the possibility of extreme event in one country′s banking system as a function of extreme events in other countries banking systems throughout our sample period. Our sample consists of ninety-one banks from twenty countries including all G8 and BRICS countries in operation from 6th January 2006 up to 31st December 2015. Overall, we find evidence of strong correlations between countries’ banking systems especially between those of UK and US. Our findings suggest the need for greater regulatory control over banks operating as global systemically important banks (GSIBs).

Keywords: Global systemically important banks (GSIBs); Extreme value theory (EVT); Distance to default (DD); Distance to insolvency (DI); Distance to capital (DC); Logistic regression model (search for similar items in EconPapers)
JEL-codes: G1 G14 G17 G21 G31 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:63:y:2019:i:c:s1042443118300684

DOI: 10.1016/j.intfin.2019.101136

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