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A Comprehensive Approach for Calculating Banking Sector Risks

Author

Listed:
  • Carmelo Salleo

    () (European Central Bank, 60314 Frankfurt, Germany
    These authors contributed equally to this work.)

  • Alberto Grassi

    () (European Central Bank, 60314 Frankfurt, Germany
    These authors contributed equally to this work.)

  • Constantinos Kyriakopoulos

    () (Department of Mathematics, National and Kapodistrian University of Athens, 15772 Athens, Greece)

Abstract

We propose a comprehensive approach for the analysis of real economy and government sector risk transmission to the banking system and apply it in ten Euro-Area countries from 2005 to 2017. A flexible methodology is developed to model banks’ assets according to the risk-adjusted balance sheet of the counterparts. The use of distance to distress as a popular risk metric shows that Contingent Claims Analysis underestimates banks risk in stable periods and overstates it during crisis. Furthermore, the approach succeeds in detecting spillovers from households, non-financial corporations and sovereign sectors: for the countries examined the main source of instability comes from the Non-Financial Corporation sector and its increased assets volatility.

Suggested Citation

  • Carmelo Salleo & Alberto Grassi & Constantinos Kyriakopoulos, 2020. "A Comprehensive Approach for Calculating Banking Sector Risks," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 8(4), pages 1-21, November.
  • Handle: RePEc:gam:jijfss:v:8:y:2020:i:4:p:69-:d:442485
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    banking risks; distance-to-default; contingent claims analysis;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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