Co-movements in EU banks’ fragility: a dynamic factor model approach

Andrea Brasili and Giuseppe Vulpes ()
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Andrea Brasili: UniCredit Banca d'Impresa

Finance from EconWPA

Abstract: We analyse co-movements in the fragility of EU banks and verify to which extent such co-movements have increased in time, following, for example, the completion of Monetary Union and the introduction of the euro. To this end, we provide a measure of co-movements in bank risk by means of a dynamic factor model, which allows to decompose an indicator of bank fragility, the Distance-to-Default, into three main components: an EU- wide, a country-specific and a bank-level idiosyncratic component. Our results show the commonality in bank risk appears to have significantly increased since 1999, in particular if one concentrates on large banks. This has obvious consequences in terms of systemic stability, but may also have far reaching policy implications with regards to the structuring of banking supervision in Europe (i.e. it increases the scope for supervisory co-operation at EU-wide level). We also believe that co-movements in bank conditions are important for monetary policy since banks still constitute monetary policy’s most important transmission channel.

Keywords: Co-movements; dynamic factor models; distance-to-default; Systemic risk (search for similar items in EconPapers)
JEL-codes: C51 F36 G15 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-eec, nep-fin and nep-ifn
Date: 2004-11-08, Revised 2005-11-02
Note: Type of Document - pdf; pages: 37
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411011

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