The International Monetary Fund (IMF) have released a stack of reports and papers over the last couple of days, including the one stating that the Greek bailout operation has been more or less – a fiasco, so far. But there’s more: New research indicates that the international banking is continuously increasing their risk taking and that more any more trouble with the European banks may have severe spillover effects on financial institutions outside Europe,
“Both German and French banks mostly transmit/receive shocks to other European banks, especially in the UK. French and U. banks pre-crisis also appear to have strong spillover to Russia. Outside of Europe, spillover are largely confined to the US.”
Hélène Poirson/Jochen Schmittmann
The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any globalization of the euro area crisis is likely to be channelled through UK. and US banks, the research paper says.
The report “Risk Exposures and Financial spillover in Tranquil and Crisis Times: Bank-Level Evidence” provided by Hélène Poirson and Jochen Schmittmann was released yesterday in the shadow of IMF’s Greek audit report.
(Transcript of IMF press briefing on Greece here.).
This report is not necessary reflecting the official IMF view, but provides some interesting details on who will influence who if more trouble occur.
The researchers have discovered a clear pattern of interconnectedness between European banks.
“French and German banks co-move strongly only with selected US financial institutions, while UK banks are connected strongly with both Asia (pre-crisis only) and the US (in both periods).”
“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”
“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”
Moreover, the researchers have mapped the connections between the individual institutions.
“The estimation framework allows us to highlight the presence of “clusters” of interconnected banks that tend to co-move together more strongly than with other banks, either due to inter-bank linkages (counterparty relationships, interbank-lending) or the exposure to common vulnerabilities.”
A few examples
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- Large German banks appear to co-move strongly either with other German banks or with other European banks.
- Spillover from German banks to other European banks are most pronounced in the case of French and U.K. banks and, to a lesser extent, in the case of Dutch, Belgian, and Swiss banks.
- During the subprime crisis and in the post-crisis period, a Franco-German cluster can be detected comprising Deutsche Bank and BNP Paribas and a UK-German cluster comprising Commerzbank, Barclays, and RBS.
- None of the banks from peripheral crisis European countries (GIIPS) are found to co-move in a significant way with the largest German banks.
- Spillover from German banks to other regions appear limited to the US: prior to the subprime crisis, two of the large German banks seem to co-move significantly with banks in the U.S. (namely, Deutsche Bank with Lehman Brothers and Hypo Real Estate with Goldman Sachs)25; during and following the subprime crisis, Freddie Mac and Fannie Mae have synchronized returns with the largest German financial institutions (Deutsche Bank, Commerzbank, and Allianz), which in turn can be traced back to the latter’s sizeable holdings of subprime portfolios and related exposures to US real estate.
Conclusions
“Similar to German banks, the spillover of French banks to other regions are largely limited to U.S. financial institutions and can only be detected since the onset of the subprime crisis.”
“The financial spillover of U.K. banks, by contrast, reach beyond Europe in both periods. Pre-crisis, there is empirical evidence of strong co-movement of US, Indian and Chinese banks with U.K. banks; during the subprime crisis and post-crisis, spillover to U.S. banks are dominant and the analysis does not detect any co-movement with banks in other regions.”
“In summary, we can tentatively conclude from the analysis of bank-level spillover that direct financial spillover from the EA banking and sovereign debt crisis transmitted through the equity markets outside of Europe are likely to be confined to US banks and financial institutions. Indirectly, however, given the role of the US as a global financial hub, such spillover – if they were to intensify – could potentially transmit more widely to systemic banks in other regions (Asia, Latin America, and Middle East).”
“The analysis in this study leaves unspecified the channels of transmission of financial spillover both within countries and across borders. While this undertaking is beyond the scope of this paper, it would be an important avenue for further research.”
Definitively!
(Download the full report here.)
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More fun stuff:
- Please, Don’t Mention “Contagion”!
- IMF Director Christine Lagarde Sees “Crisis of Confidence”
- The Worlds Most Contagious Countries – Here’s The List
- Europe In Debt (Part 1): Creating a Monster
- Europe In Debt (Part 2): Poisonous PIIGS With Toxic Lipstick
- Europe In Debt (Part 3): Exit On Main Street
- In The Bright Minds Of IMF
Other possible related articles:
- IMF admits mistakes on Greek bailout (bbc.co.uk)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
- ‘Masters of Austerity’ Targeted as Blockupy Activists Shut Down European Central Bank (commondreams.org)
- German banks can´t withold Dibabank (yournovelty.wordpress.com)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
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