Does Financial Connectedness Predict Crises?

Abstract

The global financial crisis has reignited interest in models of crisis prediction. It has also raised the question whether financial connectedness - a possible source of systemic risk - can serve as an early warning indicator of crises. In this paper we examine the ability of connectedness in the global network of financial linkages to predict systemic banking crises. Our results indicate that increases in a country's financial interconnectedness and decreases in its neighbors' connectedness are associated with a higher probability of banking crises after controlling for macroeconomic fundamentals.

Keywords: Global Financial Crisis 2008-2009, Banking crisis, Financial risk, Economic integration, early warning systems, systemic risk, financial networks, banking crises, banking systems, banking network, banking networks, systemic banking crises, systemic banking crisis, banking assets, banking system exposures, bank relationships, banking distress, bank portfolios, banking transactions, banking statistics, contagion, interbank market, systemic banking distress, bank exposure, currency crises, foreign asset

JEL Classification: F01, F36, F47