Determinants of European banks’ default risk

Nicolas Soenen and Rudi Vander Vennet

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: Using bank CDS spreads, we examine three types of determinants of Euro Area bank default risk in the period 2008–2019: bank characteristics related to new regulation, the bank-sovereign nexus and the monetary policy stance. We find that Basel 3 regulation improves the banks’ risk profile since higher capital ratios and more stable deposit funding contribute significantly to lower CDS spreads. We confirm the persistence of the bank-sovereign interconnectedness and find that sovereign default risk is transmitted to bank risk with an amplification factor. The ECB monetary policy stance is neutral with respect to bank risk, hence we find no evidence of perceived excessive risk-taking behavior.

Keywords: Bank default risk; CDS spreads; Monetary policy; Sovereign risk (search for similar items in EconPapers)
JEL-codes: E52 G21 G32 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Determinants of European Banks’ Default Risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s154461232100516x

DOI: 10.1016/j.frl.2021.102557

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