The role of the banking system in the international transmission of shocks

Among the channels discussed in the paper, we regard the presence of a common lender as the most important source of vulnerability. This view is induced by a growing empirical evidence, which points to the significant effects of this channel on the probability of a financial crisis, while mitigating the role of bank runs and remaining inconclusive about moral hazard. This evidence motivates the research of appropriate indices which measure vulnerability to the common lender channel by taking into account both the borrower's dependence and the lender's exposure. In this paper we build a series of such indices and we compare the degree of vulnerability to the common lender channel during the 1990s major crises and in a recent tranquil period (the second quarter of 2000). In the next section, we offer a theoretical examination of the channels that favor the transmission of financial shocks through the banking system. In Section 3, we present some stylised facts related to these channels. Notable points here are: the strong concentration of loans and the presence of a common lender in the regions involved in the contagious financial crises of the second half of the 1990s; the apparent irrelevance of episodes of bank panics during the last twenty years; the recent widespread diffusion of explicit deposit insurance. In Section 4 we discuss the relevance of the different channels of transmission in the light of recent empirical studies. Section 5 proposes some indices of vulnerability to contagion stemming from the concentration of loans from the same lender. Section 6 concludes.