Were there warning signals from banking sectors for the 2008/2009 global financial crisis?

John Simpson

Applied Financial Economics, 2010, vol. 20, issue 1-2, 45-61

Abstract: This article takes the position that there have been significant costs attached to global banking financial integration and these costs were identified in a period prior to the 2008 Global Financial Crisis revealed by the analysis of daily country banking index data from December 1999 to September 2008. Regression, correlation, cointegration, causality and variance decomposition analysis of daily bank price index data indicate that banking systems had achieved a high level of global integration, exemplified in the global involvement in the US sub-prime mortgage market. Integration implies interdependence, which in turn implies the existence of systemic risk or the threat of contagion. Re-focusing by banks on a culture of portfolio diversification of investments and borrowings is necessary. Greater involvement by a global banking regulatory authority such as the Bank for International Settlements (BIS) to monitor undiversified systemic interdependence may be inevitable (e.g. the administration of insurance schemes for interbank lines of credit).

Date: 2010
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DOI: 10.1080/09603100903262913

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