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

By Sònia Muñoz, Ryan Scuzzarella, Martin Cihak

August 1, 2011

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Sònia Muñoz, Ryan Scuzzarella, and Martin Cihak. The Bright and the Dark Side of Cross-Border Banking Linkages, (USA: International Monetary Fund, 2011) accessed December 30, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bank soundness, Banking, Banking crises, Commercial banks, Financial contagion, Financial crises, Financial institutions, Financial sector policy and analysis, Financial sector stability

Keywords: Bank soundness, Banking crises, Banking crisis, Banking network, Banking sector, Banking sector capitalization, Banking sector crisis, Banking stability, Banking system, Commercial banks, Estimation, Estimation procedure, Financial contagion, Financial sector stability, Global, Interconnectedness, Network analysis, Network analysis literature, Probit estimate, Stock price volatility, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/186
Stock No:

WPIEA2011186
ISBN:

9781462309269
ISSN:

1018-5941

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