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

  • Lamont Black
  • Ricardo Correa
  • Xin Huang
  • Hao Zhou
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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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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. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary Leverage Cycles and Financial Stability," Working Papers 2012-010, Becker Friedman Institute for Research In Economics.
  2. Paul Glasserman & Jingyi Li, 2005. "Importance Sampling for Portfolio Credit Risk," Management Science, INFORMS, vol. 51(11), pages 1643-1656, November.
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  5. Ricardo Correa & Kuan-Hui Lee & Horacio Sapriza & Gustavo Suarez, 2012. "Sovereign credit risk, banks' government support, and bank stock returns around the world," International Finance Discussion Papers 1069, Board of Governors of the Federal Reserve System (U.S.).
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  14. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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  16. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  17. 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.
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