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On bank credit risk: systemic or bank-specific? Evidence from the US and UK

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  • Junye Li

    ()
    (ESSEC Business School)

  • Gabriele Zinna

    ()
    (Bank of Italy)

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    Abstract

    We develop a multivariate credit risk model that accounts for joint defaults of banks and al-lows us to disentangle how much of banks' credit risk is systemic. We find that the US and UK dif-fer not only in the evolution of systemic risk, but in particular in their banks' systemic exposures. In both countries, however, systemic credit risk varies substantially, represents about half of total bank credit risk on average, and induces high risk premia. Further, the results suggest that sovereign and bank systemic risk are particularly interlinked in the UK.

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    File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td14/td951_14/en_td951/en_tema_951.pdf
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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 951.

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    Date of creation: Feb 2014
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    Handle: RePEc:bdi:wptemi:td_951_14

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    Related research

    Keywords: systemic bank credit Risk; credit default swaps; distress risk premia; Bayesian estimation;

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    1. Kay Giesecke & Baeho Kim, 2011. "Systemic Risk: What Defaults Are Telling Us," Management Science, INFORMS, vol. 57(8), pages 1387-1405, August.
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    7. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
    8. Jorge A. Chan-Lau & Toni Gravelle, 2005. "The End," IMF Working Papers 05/231, International Monetary Fund.
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    10. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
    11. Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
    12. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-70, April.
    13. Robert F. Dittmar, 2008. "Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets?," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1983-2014, September.
    14. Peter Feldhütter & Mads Stenbo Nielsen, 2012. "Systematic and Idiosyncratic Default Risk in Synthetic Credit Markets," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(2), pages 292-324, 2012 05.
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