Cross-Border Bank Contagion in Europe

Reint Gropp, Marco Lo Duca and Jukka Vesala
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Jukka Vesala: Financial Supervision Authority of Finland (Fin-FSA), Helsinki

International Journal of Central Banking, 2009, vol. 5, issue 1, 97-139

Abstract: We analyze cross-border contagion among European banks in the period from January 1994 to January 2003. We use a multinomial logit model to estimate, in a given country, the number of banks that experience a large shock on the same day (“coexceedances”) as a function of common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in distance to default of banks.We find evidence of significant cross-border contagion among large European banks, which is consistent with a tiered cross-border interbank structure. The results also suggest that contagion increased after the introduction of the euro. JEL Codes: G21, F36, G15.

Date: 2009
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Related works:
Working Paper: Cross-Border Bank Contagion in Europe (2007)
Working Paper: Cross-border bank contagion in Europe (2006)
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