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The systemic risk of European banks during the financial and sovereign debt crises

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  • Lamont Black
  • Ricardo Correa
  • Xin Huang
  • Hao Zhou
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Abstract

We propose a hypothetical distress insurance premium (DIP) as a measure of the European banking systemic risk, which integrates the characteristics of bank size, default probability, and interconnectedness. Based on this measure, the systemic risk of European banks reached its height in late 2011 around € 500 billion. We find that the sovereign default spread is the factor driving this heightened risk in the banking sector during the European debt crisis. The methodology can also be used to identify the individual contributions of over 50 major European banks to the systemic risk measure. This approach captures the large contribution of a number of systemically important European banks, but Italian and Spanish banks as a group have notably increased their systemic importance. We also find that bank-specific fundamentals predict the one-year-ahead systemic risk contribution of our sample of banks in an economically meaningful way.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1083.

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Date of creation: 2013
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Handle: RePEc:fip:fedgif:1083

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  1. International Monetary Fund, 2011. "Capital Regulation and Tail Risk," IMF Working Papers 11/188, International Monetary Fund.
  2. Juan Ignacio Pena & Santiago Forte, 2006. "CREDIT SPREADS: THEORY AND EVIDENCE ABOUT THE INFORMATION CONTENT OF STOCKS, BONDS AND CDSs," Business Economics Working Papers wb063310, Universidad Carlos III, Departamento de Economía de la Empresa.
  3. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
  4. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer, vol. 42(1), pages 55-83, October.
    • Xin Huang & Hao Zhou & Haibin Zhu, 2011. "Systemic risk contributions," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 36-43 Bank for International Settlements.
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Cited by:
  1. Rughoo, Aarti & Sarantis, Nicholas, 2014. "The global financial crisis and integration in European retail banking," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 28-41.

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