Global banks and systemic risk: The dark side of country financial connectedness

Abstract

We study the relation between country financial connectedness and systemic risk for U.S. banking organizations with global exposures. Using supervisory data on U.S. banks’ foreign claims, we find that banks with exposure to countries with globally connected financial markets contribute more to U.S. systemic risk. These adverse effects are amplified by systemically important and less capitalized banking organizations. Consistent with the idea that financial connectedness is a conduit for risk transmission, risk spillovers to the U.S. from foreign financial crises are magnified when the countries in crisis are well financially connected. Our findings are relevant for macro-prudential policy given the concentration of U.S. financial claims in well-connected markets.