Abstract

This paper investigates and tests the role of regional exposures in financial contagion from advanced to emerging market economies through the global banking network using data on cross-border bilateral bank claims and liability positions. It first examines whether an economy can become more susceptible to capital outflows, regardless of its own bank exposures, if economies in the same region are heavily exposed to crisis countries. Secondly, it tests whether the same region lenders tend to reduce exposures to the emerging market borrowers less than do different region lenders during crises.

Highlights

  • As advanced countries start to normalize monetary policies, concerns arise about the vulnerability of emerging market economies (EMEs)

  • This paper examines whether an economy can be more susceptible to bank capital outflows regardless of its own bank exposures if other economies in the same region are heavily exposed to crisis countries

  • The network of cross-border banking appears to play an important role in financial contagion and how shocks are transmitted across borders

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Summary

INTRODUCTION

As advanced countries start to normalize monetary policies, concerns arise about the vulnerability of emerging market economies (EMEs). During the global financial crisis in 2008, many Asian EMEs again simultaneously experienced a sharp increase in gross capital outflows, driven largely by retrenchments in global cross-border bank lending activities, even though the crisis did not originate from these economies These episodes suggest that financial crises are contagious and banking flows can be susceptible to the perception of market risks. Using the BIS statistics, we find that after controlling borrowers’ exposures to crises countries, as well as their economic fundamentals, the same region lenders tend to reduce their exposures to the emerging market borrowers less during crisis This finding is consistent with De Haas and Van Horen (2013) and Cerutti, Hale, and Minoiu (2015), which emphasize the role of regional banking networks in mitigating crisis propagation if a shock originates outside the region.

BILATERAL BANK CLAIMS DATA AND THEIR REGIONAL DECOMPOSITION
REGIONAL CONTAGION OF VULNERABILITIES
EMPIRICAL FINDINGS
CONCLUSION
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