Dissertation: A failing bank could have infected two thirds of the other banks
Mervi Toivanen's thesis in Economics “Essays on Credit Contagion and Shocks in Banking” examines the impact of shocks on banks in the context of financial crises.
Toivanen studies credit contagion in Finnish and European interbank markets as well as the effects of capital and liquidity pressures on euro area banks’ lending and the macro economy.
First, she studies the domestic and foreign credit contagion via Finnish banks’ interbank exposures.
– The results show that domestic contagion affects, on average, almost half of the Finnish banking sector in the 1990s and 66 percent in 2005–2011. In the 2000s, the failure of a foreign bank impacts 77 percent of the total assets of Finnish banks, Toivanen says.
Toivanen also examines credit contagion at the European level. The average contagion affects 70 percent and 40 percent of European banks’ total assets in 2007 and in 2010, respectively.
Contagion is most prevalent among the French, British, German and Spanish banks.
The most prominent factors for determining the magnitude of contagion are the bank’s central position in the network, bank clusters with large interbank loans, number of links and bank size.
In the third essay Toivanen analyses euro area banks’ internal target capital ratios and whether banks’ adjustments towards their targets affect their balance sheets. She tells that the results indicate that euro area banks were undercapitalised in 2008.
– While closing the capital gap, banks reduce lending less than security holdings.
The fourth essay of Toivanen’s thesis disentangles the impact of risk, funding and sovereign shocks in the euro area as a whole and in Germany, France, Italy and Spain.
In 2009 the shocks account for about 60 percent of the decrease in corporate lending and around a third of the decline of annual GDP growth in the euro area.
– While shocks exhibit a notable impact on Germany and France in 2009–2011, they are significant for Italian and Spanish banks only towards the end of the simulation period.
Public Defence
The public examination of M.Sc. Mervi Toivanen’s doctoral dessertation ”Essays on Credit Contagion and Shocks in Banking” will be on Friday 28 August at 12 o´clock in auditorium Kurtén (Tervahovi). Professor Koen Schoors (Ghent University) will act as opponent and Professor Hannu Piekkola as a custos.
Further information: Mervi Toivanen, tel. +358 50 387 0447, e-mail: firstname.lastname@bof.fi
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