Bank risk behavior and connectedness in EMU countries
Given the structural differences in banking sector and financial regulation at national level in 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...
| Authors: | , , |
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| Format: | article |
| Publication Date: | 2015 |
| Country: | España |
| Institution: | Universidad Complutense de Madrid (UCM) |
| Repository: | Docta Complutense |
| Language: | English |
| OAI Identifier: | oai:docta.ucm.es:20.500.14352/34190 |
| Online Access: | https://hdl.handle.net/20.500.14352/34190 |
| Access Level: | Open access |
| Keyword: | G01 G13 G21 G28 Contingent claim analysis Distance-to-default Banking risk. Bancos y cajas Crisis económicas Finanzas 5307.06 Fluctuaciones Económicas |
| Summary: | Given the structural differences in banking sector and financial regulation at national level in 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. |
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