Solvency vs. liquidity. A decomposition of European banks' credit risk over the business cycle

Guillaume Vuillemey

International Economics, 2014, issue 137, 32-51

Abstract: This paper provides evidence for the procyclicality of banks' credit risk by investigating the historical resilience of several European banking sectors before and after the 2008 banking crisis. It provides a decomposition of banks' probabilities of default between a solvency and a liquidity component. The results show a gradual build-up of fragilities before 2008 in most countries. Increased probabilities of default are shown to be mainly driven by a surge in liquidity risk, even when shocks of relatively low magnitude are imposed on the system.

Keywords: Solvency; Liquidity; Global games; Banking crises; Procyclicality (search for similar items in EconPapers)
JEL-codes: G17 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2014-q1-137-3

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