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

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

Abstract

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.

Suggested Citation

  • Black, Lamont & Correa, Ricardo & Huang, Xin & Zhou, Hao, 2016. "The systemic risk of European banks during the financial and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 107-125.
  • Handle: RePEc:eee:jbfina:v:63:y:2016:i:c:p:107-125
    DOI: 10.1016/j.jbankfin.2015.09.007
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    More about this item

    Keywords

    Banking systemic risk; European debt crisis; Too-big-to-fail; Leverage; Correlation; Credit default swap; Macroprudential regulation;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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