Default Intensity and Expected Recovery of Japanese Banks and "Government": New Evidence from the CDS Market

Yoichi Ueno and Naohiko Baba
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Yoichi Ueno: Bank of Japan
Naohiko Baba: Bank of Japan

No 06-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Using term structure data of Credit Default Swap (CDS) spreads for the four Japanese mega-banks and the government, we jointly estimate the default intensity and expected recovery (loss) given a default. In doing so, we attempt to further identify the difference in the expected recovery ratios between senior and subordinated CDS contracts. Estimation results are summarized as follows. (i) The default intensities for the banks and the government substantially rose in times of a banking crisis since the late 1990s. (ii) The expected recovery ratios for subordinated CDS contracts are significantly smaller than those for senior CDS contracts, ranging from 46 to 85 percent of those for senior CDSs, depending on the banks. (iii) Each bank's default intensity is significantly cointegrated with, and reacts to, the Japanese government's default intensity. This result implies that a systemic risk factor among Japanese major banks is closely related to the default intensity of the Japanese government.

Keywords: Credit Default Swap; Japanese Banks; Sovereign CDS; Subordinated CDS; Loss Given Default (search for similar items in EconPapers)
JEL-codes: G12 G21 (search for similar items in EconPapers)
Date: 2006-03
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Citations: View citations in EconPapers (7)

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