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Banking System Stability: A Cross-Atlantic Perspective

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  • Philipp Hartmann
  • Stefan Straetmans
  • Casper G. De Vries

Abstract

This paper derives indicators of the severity and structure of banking system risk from asymptotic interdependencies between banks%u2019 equity prices. We use new tools available from multivariate extreme value theory to estimate individual banks%u2019 exposure to each other (%u201Ccontagion risk%u201D) and to systematic risk. Moreover, by applying structural break tests to those measures we study whether capital markets indicate changes in the importance of systemic risk over time. Using data for the United States and the euro area, we can also compare banking system stability between the two largest economies in the world. Finally, for Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in Europe. On both sides of the Atlantic systemic risk has increased during the 1990s.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11698.

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Date of creation: Oct 2005
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Publication status: published as Banking System Stability. A Cross-Atlantic Perspective , Philipp Hartmann, Stefan Straetmans, Casper de Vries. in The Risks of Financial Institutions , Carey and Stulz. 2006
Handle: RePEc:nbr:nberwo:11698

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