The Bright and the Dark Side of Cross-Border Banking Linkages

Sònia Muñoz, Ryan Scuzzarella and Martin Cihak ()

No 2011/186, IMF Working Papers from International Monetary Fund

Abstract: When a country's banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country's banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.

Keywords: WP; banking crisis; banking system; banking sector; estimation; banking stability; interconnectedness; network analysis; banking crises; banking network; banking sector capitalization; probit estimate; network analysis literature; banking sector crisis; estimation procedure; stock price volatility; Financial contagion; Commercial banks; Bank soundness; Financial sector stability; Global (search for similar items in EconPapers)
Pages: 51
Date: 2011-08-01
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Citations: View citations in EconPapers (17)

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Journal Article: The Bright and the Dark Side of Cross-Border Banking Linkages (2012)
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