Cross-Border Bank Contagion In Europe
by Reint Gropp of the European Business School & the Centre for European Economic Research (ZEW),
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.
Keywords: Banking, Contagion, Distance to default, Multinomial logit model.
Published in: International Journal of Central Banking, Vol. 5. No. 1, (March 2009), pp. 97-139.