The transmission of stress in the international banking system

Lilian Muchimba, Alexis Stenfors

Research output: Chapter in Book/Report/Conference proceedingChapter (peer-reviewed)peer-review


Significant and volatile deviations from the covered interest parity (CIP) are indicators of stress in the international banking system. This chapter uses a TVP-VAR model to investigate the dynamic connectedness and spillovers of such stress between the US, the UK, Japan and the Eurozone from 4 July 2006 to 9 June 2022. To do so, we use daily price data on cross-currency basis swaps (CRSs), typically used to trade and express CIP deviations for maturities of 1 year and beyond. We also incorporate a yield curve dimension by including prices representative of the short term (1Y), medium term (5Y) and long term (10Y) to obtain a more nuanced picture of the role of market expectations. Our findings suggest that overall connectedness is highly event-dependent and peaks during periods of high volatility and market stress. However, the transmission mechanism across banking systems and yield curve maturities has evolved considerably over time, which has significant implications for policies attempting to mitigate future crises.
Original languageEnglish
Title of host publicationInternational Banking in Global Perspective
EditorsCarmela D'Avino, Mimoza Shabani
Number of pages25
ISBN (Electronic)9781003307846
ISBN (Print)9781032310602
Publication statusPublished - 4 Mar 2024

Publication series

NameRoutledge International Studies in Money and Banking

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