Liquidity and Equity Short term fragility: Stress-tests for the European banking system

Guillaume Arnould, Catherine Bruneau () and Zhun Peng ()
Additional contact information
Catherine Bruneau: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Zhun Peng: EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne

Post-Print from HAL

Abstract: This paper investigates the impact of extreme shocks on stock and bond markets on listed European banks. The originality of our approach consists in dealing jointly with stock and bond markets and taking into account their interdependencies in case of extreme events by using a specific CVRF (CVine Risk Factor) model which combines copulas and a factorial structure. Moreover, contrary to what is generally done in the literature, we do not focus only on the responses of the stock returns but we also examine the response of the balance sheets of the banks and particularly of their short term assets in order to assess their fragility in terms of liquidity. Our main findings are the following: 1) the nature of the banks' fragility has changed: today, the interest rate risk should be the first concern before the equity risk, as the banks have extensively increased their exposition to bond market due to flight-to-quality reactions and to large investments in governments bonds after the rescue operations the banks have benefited; 2) in case of a surge in the interest rate and in the links between stock and bond returns, the portfolios of the biggest banks in Europe would experience very severe shortfalls for both equity and liquidity buffers. Accordingly regulators should monitor the evolution of dependencies between assets and should pay utmost attention to the positive links between stock and bond returns.

Keywords: Stress-test; Financial Stability; Extreme Risks; Bank Balance Sheet; Systemic Risk; Copula; Risk factors; Stress-tests; stabilité financière; risques extrêmes; bilans bancaires; risque systémique; copules; facteurs de risque (search for similar items in EconPapers)
Date: 2015-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01254729
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in 2015

Downloads: (external link)
https://shs.hal.science/halshs-01254729/document (application/pdf)

Related works:
Working Paper: Liquidity and Equity Short term fragility: Stress-tests for the European banking system (2015)
Working Paper: Liquidity and Equity Short term fragility: Stress-tests for the European banking system (2015)
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:hal:journl:halshs-01254729

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().