Distance to default and the financial crisis

Alistair Milne ()

Journal of Financial Stability, 2014, vol. 12, issue C, 26-36

Abstract: This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers.

Keywords: Bank default; Bank moral hazard; Bank regulation; Bank safety net; Contingent claims; Early warning systems; Global financial crisis; Market-based risk measurement; Systemic risk; Risk shifting (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308913000442
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Distance to Default and the Financial Crisis (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:12:y:2014:i:c:p:26-36

DOI: 10.1016/j.jfs.2013.05.005

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().