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Large EU banks’ capital and liquidity: Relationship and impact on credit default swap spreads

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  • Sclip, Alex
  • Girardone, Claudia
  • Miani, Stefano

Abstract

This paper explores the interrelations between bank capital and liquidity and their impact on the market probability of default. We employ an unbalanced panel of large European banks with listed credit default swap (CDS) contracts during the period 2005–2015, which allow us to consider the impact of the recent financial crisis. Our evidence suggests that bank capital and funding liquidity risk as defined in Basel III have an economically meaningful bidirectional relationship. However, the effect on CDS spread is ambiguous. While capital appears to have a relatively large impact on CDS spread changes, liquidity risk is priced only when it falls below the regulatory threshold.

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  • Sclip, Alex & Girardone, Claudia & Miani, Stefano, 2019. "Large EU banks’ capital and liquidity: Relationship and impact on credit default swap spreads," The British Accounting Review, Elsevier, vol. 51(4), pages 438-461.
    • Handle: RePEc:eee:bracre:v:51:y:2019:i:4:p:438-461
    DOI: 10.1016/j.bar.2018.10.001
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    More about this item

    Keywords

    EU banks; Capital; Liquidity; Credit default swaps (CDS); Financial crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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