Cross-Border Bank Contagion in Europe

We analyze cross-border contagion among European banks in the period from January 1994 to January 2003. We use a multinomial logit model to estimate, in a given country, the number of banks that experience a large shock on the same day (“coexceedances”) as a function of common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in distance to default of banks.We find evidence of significant cross-border contagion among large European banks, which is consistent with a tiered cross-border interbank structure. The results also suggest that contagion increased after the introduction of the euro.

01. March 2009

Authors Reint E. Gropp M. Lo Duca Jukka M. Vesala

Professor Reint E. Gropp, PhD

About the author

Professor Reint E. Gropp, PhD

Reint E. Gropp joined the Institute as President in November 2014. He is also a Professor of Economics at the Otto von Guericke University Magdeburg. He is Associate Fellow of the Center for Economic Policy Research (CEPR) and serves as consultant for various central banks.

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