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 par- ent bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze interde- pendencies in downward risk in the banking sectors of the Czech Republic, Hungary, Poland, and Slovakia during 1994-2013. In contrast to the pre- sumptions of the current regulatory policy of these countries, we find that the risk of contagion from a foreign parent bank to its local subsidiary is substantially smaller than the risk between two local banks.