The determinants of systemic risk contagion

Abstract

The elevated interconnectedness of the global financial system has resulted in an increased frequency of financial crises, characterized by the swift transmission of turmoil between countries. This study introduces a novel quantile-connectedness-based contagion metric and investigates the drivers of systemic risk contagion, employing methodologies that address endogeneity and time-variation. We analyze data spanning two decades from 27 international banks and encompassing balance sheet-derived variables. Our findings indicate that contagion during the 2004–2021 period is largely driven by credit risk and leverage, while the impact of size and capital adequacy weakens after 2012. Furthermore, funding structure and profitability only display a significant effect during the 2014–2017 and Covid-19 periods, respectively. We also observe distinct peaks and troughs in each bank's systemic risk propagation, although they share commonalities with their counterparts. Given our findings, we suggest a holistic systemic risk surveillance model that employs high-frequency data and simultaneously incorporates multiple risk factors.