Financial Contagion in the Era of Globalised Banking, OECD Economics Department, Policy Notes, No. 14, June 2012.

• “One factor that made the recent financial crisis so deep and widespread is the extent and nature of international banking integration, which led to unprecedented transmission of financial instability.
• Financial contagion through international banking occurs e.g. when banks in a given country respond to deteriorations in their balance sheet by reducing cross-border loans, including vis-á-vis clients in countries that are not directly exposed to the initial financial shock.
• Initial deteriorations in a bank’s balance sheet can result from an adverse shock to its home country’s economy, but also from a deterioration in the quality of its loans vis-à-vis third party debtor countries. This implies that countries may suffer from shocks to countries with which they have no direct economic or financial connection.
• During the recent crisis, several Central and Eastern European countries that were particularly exposed to Western European banks saw their financial conditions deteriorate as the latter sought to repatriate loans to these countries in reaction to losses incurred on their asset portfolio in other countries…”
• Related postings on financial system