Study On The Correlation Between Contagion Of Financial Crisis And The Contraction Of Reporting Banks’ Foreign Claims

The financial crisis broke out in the United States which is the central of financial markets andhas affected so many countries. To measure the foreign exposure of the national bank and controlthe contagion, BIS required States to report their foreign claims regularly in the eighties of the lastcentury. Banks’ foreign claims is an important part of international capital and also can reflect thedistribution of a country’s banking assets overseas. As financial intermediaries, banks are becomingincreasingly important in international capital flows. After the outbreak of the crisis, the countries’banks may shrink their foreign claims. If every country’s banks shirk their foreign claims, debtorcountries will have less capital flows into and be caused by infection of the crisis.Study on the impact of foreign claims to liquidity, we learn from the Fed which divided intoG-10developed countries, non-G-10developed and developing countries. From the VAR Test, weknow that the contraction of the nation’s banks’ foreign claims is the reason for changes in thevolume of broad money supply of G-10and non-G-10developed countries, and the reason forchanges in narrow money supply in developing countries. Based on the contraction of the nation’sbanks’ foreign claims, developed countries are easier to be infected than developing countries.The contraction of liquidity in the debtor countries is caused by the contraction of the nation’sbanks’ foreign claims in varying degrees. There is a certain correlation between the debt crisiswhich break out in Europe and the contraction of the nation’s banks’ foreign claims. First, thecountries with higher liquidity shocks, such as Greece, Ireland, Portugal, Spain, Ireland, have beeninfected by the crisis, and the contraction of foreign claims is the channel of contagion. Second, thecontraction of the nation’s banks’ foreign claims to developed countries accounts for more than12%of GDP, while developing countries less than6%. Third, the reason that the United Kingdom andAustralia where the crises didn’t break out is that the other countries’ bank didn’t shrink evenincrease the claim to their government. And the other countries’ banks have shrunk the foreignclaims to the government of countries which have been infected by the crisis. If the private sector islack of liquidity, the government departments will take positive monetary policy and fiscal policy tosolve the problem. But once the government departments are lack of liquidity, government debtcrisis will occur if the government has no solvency. Fourth, the high dependence on external debt is also an important factor to trigger contagion.Our country is affected slightly by the contraction of the nation’s banks’ foreign claims, but ourgovernment should reduce reliance on foreign debt. If the government debt depends on the domesticmarket, it can have less vulnerable to the impact of the international market. As the strong backingof the economy, the Government should maintain the balance of government debt and prevent thatsolvency is insufficient.