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Assessing systemic fragility: A probabilistic perspective

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  • Radev, Deyan

Abstract

We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.

Suggested Citation

  • Radev, Deyan, 2014. "Assessing systemic fragility: A probabilistic perspective," SAFE Working Paper Series 70, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:70
    DOI: 10.2139/ssrn.2514279
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    References listed on IDEAS

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    11. Radev, Deyan, 2013. "Systemic risk and sovereign debt in the Euro area," SAFE Working Paper Series 37, Leibniz Institute for Financial Research SAFE.
    12. Dieter Gramlich & Mikhail V. Oet, 2011. "The structural fragility of financial systems: Analysis and modeling implications for early warning systems," Journal of Risk Finance, Emerald Group Publishing, vol. 12(4), pages 270-290, August.
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    Cited by:

    1. Radev, Deyan, 2013. "Systemic risk and sovereign debt in the Euro area," SAFE Working Paper Series 37, Leibniz Institute for Financial Research SAFE.
    2. Nadal De Simone, Francisco, 2021. "Measuring the deadly embrace: Systemic and sovereign risks," Research in International Business and Finance, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Banking Stability; Financial Distress; Tail Risk; Contagion;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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