Dual banking and financial contagion

Abstract EN

This paper builds a theoretical model based on Allen and Gale (2000) to analyze how an unexpected shock affecting the banking assets in one region can generate bankruptcy in a second region.

I also analyze the effect of the presence of an Islamic bank in a third region on the vulnerability of conventional banks to financial contagion.

It is shown that the Islamic bank’s assets diversification strategy across the regions reduces the likelihood of financial contagion among conventional banks.