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Distance to default and the financial crisis

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  • Milne, Alistair

Abstract

This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 12 (2014)
Issue (Month): C ()
Pages: 26-36

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Handle: RePEc:eee:finsta:v:12:y:2014:i:c:p:26-36

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Bank default; Bank moral hazard; Bank regulation; Bank safety net; Contingent claims; Early warning systems; Global financial crisis; Market-based risk measurement; Systemic risk; Risk shifting;

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References

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