Crossborder financial contagion to Germany: How important are OTC dealers?

- We model contagion between financial systems and OTC dealer banks.
- The empirical model consists of a GARCH using CDS spreads for financial institutions.
- Contagion from the US and European OTC dealers features prominently.
- US dealers are the most important source of contagion for German dealer banks.

We examine crossborder contagion from a number of financial systems to the German financial system using the information content of CDS prices in a GARCH model. After controlling for common factors which may cause comovement in security prices, we find evidence for contagion from the US and European financial systems. Assessing contagion for dealer and non-dealer banks suggests that contagion from dealer banks is the most prominent source of contagion to the German financial system. While German non-dealer banks are affected both by European and US dealers, only US dealer banks have a contagion effect to German dealer banks.