Ailing Mothers, Healthy Daughters? Contagion in the Central European Banking Sector

Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign mother bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze interdependencies in downward risk in the banking sector of the Czech Republic, Hungary, Poland, and Slovakia during 1994–2013. In contrast to the presumptions of the current regulatory policy of these countries, we find that the risk of contagion from a foreign mother bank to its local subsidiary is substantially smaller than the risk between two local banks. JEL Classification: F23, F36, G01, G21