Exploring the transmission channels of contagious bank runs
Martin Brown, Stefan Trautmann, Razvan Vlahu10 April 2014
Contagious bank runs are an important source of systemic risk. However, with observational data it is near-impossible to disentangle the contagion of bank runs from other potential causes of correlated deposit withdrawals across banks. This column discusses an experimental investigation of the mechanisms behind contagion. The authors find that panic-based deposit withdrawals can be strongly contagious across banks, but only if depositors know that the banks are economically related.
Financial contagion – the situation in which liquidity or insolvency risk is transmitted from one financial institution to another – is viewed by policymakers and academics as a key source of systemic risk in the banking sector. In particular, the events in the 2007–2009 Global Crisis have turned the attention of policymakers towards the potential contagion of liquidity withdrawals across banks and the resulting implications for financial stability.
Contagion in Europe: Evidence from the sovereign debt crisis
Paolo Manasse, Luca Zavalloni25 June 2012
If Greece defaults, what about Spain, what about the rest of the Eurozone, and what about the rest of Europe? “Contagion” has become a buzzword in international economics. This column asks whether markets are responding irrationally to the nightmare scenario or finally waking up to reality.
Determinants of banking system fragility: A regional perspective
Hans Degryse, Muhammad Ather Elahi, María Fabiana Penas21 March 2012
As we are learning time and again, if a big bank goes down it takes a lot of other things down with it. This column looks at the effect of bank fragility and failure on other nearby countries and outlines what can be done to mitigate the cross-border contagion.
It is well known that banks face shocks both on their asset and liability side. A shock that initially affects one institution can become systemic and infect the larger local economy. The globalisation of banking implies further that shocks affecting a particular bank or country can now affect not only the local real economy but also the financial system and real economy in other countries (Peek and Rosengren 1997, 2000, for example, show that shocks hitting Japanese banks generate supply-side effects on the real economy in the US).
Capping interest rates to stop contagion in the Eurozone
Bernard Delbecque17 October 2011
It is widely recognised that without a firewall around illiquid but solvent Eurozone countries, a loss of confidence in the markets could increase interest rates to levels high enough to make any country insolvent. The aim of this column is to propose a concrete plan to build such a firewall and halt the spread of contagion of the debt crisis to Italy and Spain.
A straightforward solution to stop contagion would be to appoint the ECB as a lender of last resort in the government bond markets (Wyplosz 2011a). By making it clear that it is fully committed to exert this function, the ECB would restore confidence in the markets.
The Eurozone crisis has thrown into relief the dangers of financial contagion. The authors of CEPR DP8358 analyze the causes and consequences of sovereign debt crises in zones with financial integration. They conclude that without fiscal integration, the supply of government debt in these areas reaches an inefficient equilibrium, with safer governments inefficiently issuing too little of their high-quality debt and riskier governments issuing too much.
Harald Hau, Choong Tze Chua, Sandy Lai05 February 2011
Fear of contagion across asset classes is again stalking European sovereign bond markets. This column discusses how shocks to bank stocks spread to non-financial stocks in 2007 and 2008. It finds that equity fire sales by mutual funds had a surprisingly large and devastating effect on the price of non-financial stocks. Could the sale of bonds trigger a similar reaction?
Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone
Barry Eichengreen03 December 2010
Irish interest spreads did not fall and contagion continues. Here one of the world’s leading international economists explains why. Short-sighted, wishful thinking by EU and German leadership designed a package that is not economically feasible in the long run (it would trigger a vicious debt deflation spiral) and it is not politically sustainable in the short run. The Eurozone had better have a Plan B for when the new Irish government rejects the package next year and imposes a haircut on Irish bank bondholders.
The Irish “rescue package” finalised over the weekend is a disaster. You can say one thing for the European Commission, the ECB, and the German government – they never miss an opportunity to make things worse.
Prakash Kannan, Friederike (Fritzi) Koehler-Geib03 December 2009
The subprime crisis became the global crisis when the 2007 financial shock mutated into a full-blown global economic crisis in September 2008. This column attributes the rapid transmission of financial stress to the surprise of the crisis. Using historical data, it shows that crises with a pronounced surprise element tend to result in more widespread contagion.
The “subprime crisis” became the “global crisis” when Lehman Brothers was allowed to collapse. The 2007 financial shock, which was limited to a handful of G7 nations, mutated into a full-blown global economic crisis in September 2008.
Searching for international contagion in the 2008 financial crisis
Andrew K Rose, Mark M. Spiegel03 October 2009
The 2008 financial crisis is sometimes characterised as one where financial difficulties in the US spread to the rest of the world. But is there clear evidence of such international contagion? This column reports research indicating that neither financial nor trade linkages to the US help explain the cross-country incidence of the crisis. If anything, countries more exposed to the US seem to have fared better.
The roots of the 2008 global financial crisis surely lie in the US real estate bubble, at least in part. After the US real estate market peaked in 2006, mortgage foreclosures began to rise, especially for subprime borrowers. Accordingly, the value of these mortgages – often pooled together and sold off as pools of securitised assets – began to fall.