Risk of Cross-Border Spillover of EU Bank Shocks Growing
The risk of problems affecting large European Union banks spilling over into other EU countries is less likely than spillover problems within a country, a new working paper finds. However, cross-border linkages are increasing and the spillover risk is significant enough to warrant strong cross-border supervisory cooperation, the paper says.
The Working Paper Estimating Spillover Risk Among Large EU Banks was prepared by International Monetary Fund economists Martin Čihák and Li Lian Ong, but does represent the IMF’s official views. The paper uses data through April 2007, so therefore does not include the recent period of financial turmoil.
Spillovers within domestic banking systems generally remain more likely than cross-border spillovers, but the number of significant cross-border links is already larger than the number of significant links among domestic banks, adding a piece of empirical evidence supporting the need for strong cross-border supervisory cooperation within the EU.
For the whole sample period, significant spillovers were found in about 40% of all possible domestic links, compared to about 9% of all possible cross-border links.
The bank with the biggest potential for spillover is Fortis, the Belgo-Dutch banking and insurance group (which ranks 19 in the EU in terms of total assets), which has significant impact on eight other banks (six cross-border and two domestic). HSBC is second, with six spillover links (five cross-border and one domestic).
Adding to cross-border linkages, The Financial Times reports that Ping An Insurance, China’s second largest life assurer, has paid $2.7bn to become the leading shareholder in Fortis. The acquisition of a 4.2% stake, the largest foreign purchase by a Chinese insurer, paves the way for cross-border collaboration to develop banking and insurance products. Ping An in turn is 17% owned by HSBC.
The IMF paper finds the relative frequency of spillovers has been increasing for cross-border linkages (from 7.6% in May 2000–November 2003 to 8.3% in December 2003–April 2007 and 8.7% in November 2005–April 2007), while for domestic linkages it has been declining (from 28.6% in May 2000–November 2003 to 18.8% in December 2003–April 2007 and 18.6% in November 2005– April 2007), the paper says.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.