Has the Global Banking System Become More Fragile over Time?
This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111108124433 http://hdl.handle.net/10986/3644 |
| Summary: | This paper examines time-series and
cross-country variations in default risk co-dependence in
the global banking system. The authors construct a default
risk measure for all publicly traded banks using the Merton
contingent claim model, and examine the evolution of the
correlation structure of default risk for more than 1,800
banks in more than 60 countries. They find that there has
been a significant increase in default risk co-dependence
over the three-year period leading to the financial crisis.
They also find that countries that are more integrated, and
that have liberalized financial systems and weak banking
supervision, have higher co-dependence in their banking
sector. The results support an increase in scope for
international supervisory co-operation, as well as capital
charges for "too-connected-to-fail" institutions
that can impose significant externalities. |
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