Bank risk behavior and connectedness in EMU countries

Manish K. Singh (), Marta Gómez-Puig () and Simon Sosvilla-Rivero
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Manish K. Singh: Faculty of Economics, University of Barcelona

No 201517, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.

Keywords: contingent claim analysis; Distance-to-default; banking risk JEL classification: G01; G13; G21; G28 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-06, Revised 2015-06
New Economics Papers: this item is included in nep-ban and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Bank risk behavior and connectedness in EMU countries (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ira:wpaper:201517

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