Distress in European Banks Before and During the Financial Crisis
30 Pages Posted: 6 Jul 2009 Last revised: 26 Jan 2010
Date Written: June 1, 2009
Using a unique data set on bank distress, this paper provides novel empirical evidence on the determinants of bank soundness in the European Union (EU) as a whole. Estimation results support the hypothesis that bank risks have converged across EU members, providing empirical justification for introduction of the pan-European system of financial regulation. We show that asset quality and earning profile of banks are important determinants of bank distress next to leverage, and should be taken into account when designing new financial regulation in the EU. Market discipline both on the side of depositors and stock market participants plays role in the EU, supporting the notion that transparency and dissemination of financial information would contribute to the financial soundness of banks. We also provide evidence in favor of contagion effects, relatively higher fragility of concentrated banking sectors, and hazards associated with high share of wholesale funding.
Keywords: bank distress, banking regulation, Basel II Accord, market discipline
JEL Classification: G21, G28
Suggested Citation: Suggested Citation