Measuring tail-risk cross-country exposures in the banking Industry

  1. Antonio Rubia 1
  2. Lidia Sanchis Marco 2
  1. 1 Universitat d'Alacant
    info

    Universitat d'Alacant

    Alicante, España

    ROR https://ror.org/05t8bcz72

  2. 2 Universidad de Castilla-La Mancha
    info

    Universidad de Castilla-La Mancha

    Ciudad Real, España

    ROR https://ror.org/05r78ng12

Journal:
Revista de economía aplicada

ISSN: 1133-455X

Year of publication: 2017

Volume: 25

Issue: 74

Pages: 27-74

Type: Article

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More publications in: Revista de economía aplicada

Abstract

This paper analyzes the vulnerability of the banking industry in advanced and emerging economic to shocks originated in or transmitted by banks in a foreign area under stressed and non-stressed conditions. The main aim is to measure cross-country sensitivities that feature systemic contagion in the international banking system and characterize how systemic shocks are propagated. To this end, we estimate the sensitivity of the expected-loss function in the local banking industry to contemporaneous shocks in foreign expected- loss functions in a dynamic equation system during the period December 1999 through November 2013, after controlling for global exposures to common factors, and considering stressed and non-stressed economic scenarios. We implement instrumental estimation to ensure robust estimates against endogeneity and characterize impulse-response functions to appraise the expected duration of tail-contagion. Our study reveals that cross-country vulnerabilities exhibit strong state-dependent patterns which largely increase during periods of distress. During tranquil or normal periods, shocks cause minor or no significant impacts are quickly absorbed by the domestic systems. Under stressed market conditions, however, even idiosyncratic shocks can trigger a pronounced response in other areas with effects that tend to last over long periods of time. Our analysis also reveals the existence of directionality in cross-border contagion, with the US banking sector being the greatest source of financial contagion worldwide and, simultaneously, being more resilient than other areas. Furthermore, systematic exposures to Central EMU area are largely significant than Peripheral Europe, being US the most vulnerable country to shocks originating in Central EMU. Finally, US and Eurozone are sensitive to shocks in Emerging banking system.

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Funding information

Financial support from the Spanish Department of Education and Innovation (projects ECO2012-33619 and ECO2014-58434P) is gratefully acknowledged.

Funders

  • Spanish Department of Education and Innovation Spain
    • ECO2012-33619
    • ECO2014-58434P

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