Abstract
AbstractThis paper examines whether the composition of a country's external liabilities and assets affects its risk of suffering financial turmoil. Using a panel of 184 developed and emerging economies from 1970 to 2009, and looking at the impact of financial account structure in normal times and in situations of bank balance‐sheet contagion shocks, we find that the structure of the financial account indeed has an important influence on financial stability. A bias in external liabilities towards debt appears to increase strongly the risk of a systemic banking crisis. Moreover, certain forms of international financial integration, such as integration through international bank lending, amplify contagion shocks and increase crisis risk, particularly in the case of short‐term bank debt.
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