Boom and Bust of Foreign Assets under Integrated Banking Systems

Boom and Bust of Foreign Assets under Integrated Banking Systems

We examine whether highly integrated banking systems across borders escalated the boom and bust of foreign assets owned by banks before and after the global financial crisis. As the financial shock dramatically affected the banking system across the globe, considering only the primary and secondary exposures to the initial shock is inadequate to capture the effect of bank linkages. Using a new specification that accommodates the situation of interconnected banking systems, we explore an overall similarity of lending structures generating the shock amplification. We also investigate whether this effect is shown differently between the boom and the bust periods and between investing areas. To prevent the spread of financial shock, our findings suggest that banks should hold a unique funding structure.