A Comprehensive Approach for Calculating Banking Sector Risks

Carmelo Salleo, Alberto Grassi and Constantinos Kyriakopoulos
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Carmelo Salleo: European Central Bank, 60314 Frankfurt, Germany
Alberto Grassi: European Central Bank, 60314 Frankfurt, Germany
Constantinos Kyriakopoulos: Department of Mathematics, National and Kapodistrian University of Athens, 15772 Athens, Greece

IJFS, 2020, vol. 8, issue 4, 1-21

Abstract: We propose a comprehensive approach for the analysis of real economy and government sector risk transmission to the banking system and apply it in ten Euro-Area countries from 2005 to 2017. A flexible methodology is developed to model banks’ assets according to the risk-adjusted balance sheet of the counterparts. The use of distance to distress as a popular risk metric shows that Contingent Claims Analysis underestimates banks risk in stable periods and overstates it during crisis. Furthermore, the approach succeeds in detecting spillovers from households, non-financial corporations and sovereign sectors: for the countries examined the main source of instability comes from the Non-Financial Corporation sector and its increased assets volatility.

Keywords: banking risks; distance-to-default; contingent claims analysis (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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