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“Bank risk behavior and connectedness in EMU countries”

Listed author(s):
  • Manish K. Singh

    ()

    (Faculty of Economics, University of Barcelona)

  • Marta Gómez-Puig

    ()

    (Faculty of Economics, University of Barcelona)

  • Simón Sosvilla-Rivero

    ()

    (Complutense Institute of International Economics, Universidad Complutense de Madrid)

Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.

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File URL: http://www.ub.edu/irea/working_papers/2015/201517.pdf
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Paper provided by University of Barcelona, Research Institute of Applied Economics in its series IREA Working Papers with number 201517.

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Length: 44 pages
Date of creation: Jun 2015
Date of revision: Jun 2015
Handle: RePEc:ira:wpaper:201517
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